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Krugman vs Free Trade

Authors: 
Timothy Cox

01/04/2010: Writing in today’s Wall Street Journal, Aaron Back is rightly sceptical of Paul Krugman’s latest rant in which he asserts that the so called “victims” of Chinese mercantilism have “little to lose from a trade confrontation.” On the contrary, the U.S., Europe and people all around the world have great deal to lose by precipitating a war on trade  with China.

Krugman is not the first economist to get hot under the collar about claims that the Chinese government is manipulating its currency to keep the costs of exporting down- Robert Aliber offered a similarly impassioned and unreasonable argument in the Financial Times last month.

Advocating protectionism in retaliation against the Chinese may be good ole Union speak, but it is terrible economics.  As Dan Ikenson has demonstrated, this “tunnel vision” approach to economic relations fails to take into account the complex nature of modern trade linkages-

“Made in China” really does mean “made with the world:”“...on average 50 percent of the value of components, raw materials, and labor embedded in the typical cargo container from China unloaded in Long Beach, California is other countries’ value added.  It means that slapping a duty on imports from China is the same as restricting imports from countries indiscriminately. It means restricting our own exports to China, which are embedded in the “high-tech” products that we import from China.”

By taxing Chinese imports consumers will have to pay more, businesses will be subject to tit-for-tat retaliations and exporters will suffer falling demand for their products. A war on trade leaves everyone a loser.