Global Crisis/Innovation Blog

Trade with China:  The Economists Still Don’t Get It!  Will They Ever?

By Shlomo Maital

 

 

 

 

 David Ricardo: 200 year old theory

J.M. Keynes was once accused by opponents of frequently changing his views.  His acerbic response:  “When the facts change, I change.  What do YOU do?!”

  I am reading Harvard Prof. N. Gregory Mankiw’s New York Times piece, “Emerging markets as partners, not rivals”, in disbelief.  Mankiw is one of the leading economists of his generation. He authored the leading Principles of Economics textbook and served as President George W. Bush’s chief economic advisor.  In his piece, he attacks President Obama’s phrase “winning the future”, used three times in Obama’s State of the Union address.  Mankiw’s claim: Trade is win-win, not about ‘winning’.  Everyone gains.  This is what David Ricardo taught over two centuries ago.

   Here are some data for America’s 2010 trade.    For all of 2010, the US trade deficit of $497.8 billion was sharply bigger than the prior year’s $374.9 billion.  America’s trade gap with China  for 2010 swelled to $273.1 billion, topping the 2008 record of $268.0 billion.  In other words, some 54 per cent of America’s total huge trade deficit is generated by unbalanced trade with China.

   China now holds some $3 trillion in reserve dollar assets, a strategic weapon China uses, and will use, aggressively to further its interests around the world.

    If America produced those $273 b. worth of goods and services it now buys from China at home (imports less exports), in America, it would gain 5 to 8 million new jobs, halving its unemployment rate.

    Here is Mankiw’s take on this situation, straight from the old-fashioned outmoded ideas of Econ 101:  “a voluntary economic transaction between consenting consumers and producers typically benefits both parties”. 

     What about this ‘voluntary’ transaction between consenting partners:  China uses a grossly-undervalued currency and under-the-table subsidies to grab America’s manufacturing, then moves to usurp America’s innovation lead as well by leveraging the link between R&D and production. 

    Free trade a la Econ 101?  Nothing at all ‘free’ about it. It’s free only on the American, buyer side.   And America rolls over and plays dead, led by the outmoded economics of economists like Mankiw – even though MIT Economist Paul Samuelson proved long ago that in a dynamic world, the static win-win idea of comparative advantage does not hold, when your trading ‘partner’  swallows the productivity gains inherent in its export specialties. 

  When will America stop acting like a pacifist Quaker in the boxing ring with Mike Tyson?  I love Quakers, but they tend not to do well in head-to-head battles.  America is now head-to-head with China. Only the American head is led by economists like Mankiw.  It seems hopeless.

   The facts have changed. America is losing in its trade with China. It has been at least since 2000, when China was America’s #8 source of imports;  it is now #1 !  Keynes would have changed his views.  When will his fellow economists in America see the light and do the same? 

* N. Gregory Mankiw. “Emerging markets as partners, not rivals”.  New York Times Feb. 12, 2011.

 

   

 Global Crisis/Innovation Blog

 The Economists Still Don’t Get It!  Will They Ever?

By Shlomo Maital

  J.M. Keynes was once accused by opponents of frequently changing his views.  His acerbic response:  “When the facts change, I change.  What do YOU do?!”

  I am reading Harvard Prof. N. Gregory Mankiw’s New York Times piece, “Emerging markets as partners, not rivals”, in disbelief.  Mankiw is one of the leading economists of his generation. He authored the leading Principles of Economics textbook and served as President George W. Bush’s chief economic advisor.  In his piece, he attacks President Obama’s phrase “winning the future”, used three times in Obama’s State of the Union address.  Mankiw’s claim: Trade is win-win, not about ‘winning’.  Everyone gains.

   Here are some data for America’s 2010 trade.    For all of 2010, the US trade deficit of $497.8 billion was sharply bigger than the prior year’s $374.9 billion.  America’s trade gap with China  for 2010 swelled to $273.1 billion, topping the 2008 record of $268.0 billion.  In other words, some 54 per cent of America’s total huge trade deficit is generated by unbalanced trade with China.

   China now holds some $3 trillion in reserve dollar assets, a strategic weapon China uses, and will use, aggressively to further its interests around the world.

    If America produced those $273 b. worth of goods and services it now buys from China at home, in America, it would gain 5 to 8 million new jobs, halving its unemployment rate.

    Here is Mankiw’s take on this situation, straight from the old-fashioned outmoded ideas of Econ 101:  “a voluntary economic transaction between consenting consumers and producers typically benefits both parties”. 

     What about this ‘voluntary’ transaction between consenting partners:  China uses a grossly-undervalued currency and under-the-table subsidies to grab America’s manufacturing, then moves to usurp America’s innovation lead as well by leveraging the link between R&D and production. 

    Free trade a la Econ 101?  Nothing at all ‘free’ about it. It’s free only on the American, buyer side.   And America rolls over and plays dead, led by the outmoded economics of economists like Mankiw – even though MIT Economist Paul Samuelson proved long ago that in a dynamic world, the static win-win idea of comparative advantage does not hold, when your trading ‘partner’  swallows the productivity gains inherent in its export specialties. 

  When will America stop acting like a pacifist Quaker in the boxing ring with Mike Tyson?  I love Quakers, but they tend not to do well in head-to-head battles.  America is now head-to-head with China. Only the American head is led by economists like Mankiw.  It seems hopeless.

   The facts have changed. America is losing in its trade with China. It has been at least since 2000, when China was America’s #8 source of imports;  it is now #1 !  Keynes would have changed his views.  When will his fellow economists in America see the light and do the same? 

* N. Gregory Mankiw. “Emerging markets as partners, not rivals”.  New York Times Feb. 12, 2011.

      

 

 

   

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