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Sunday, July 03, 2016

How do we lose in a trade war with China?

Byron York of the Washington Examiner posted, "When Mitt Romney sounded like Donald Trump," regarding Trump's trade policy. It is a short and solid piece that referenced an editorial in the National Review.
The editorial defended free trade.

From that editorial on September 7, 2011:
Mitt Romney released a jobs plan, which put him a step ahead of the current president, and it is mostly unremarkable — except for his promise to risk a trade war with China, a remarkably bad idea. In truth, it is an idea sufficient wrongheaded that it has been endorsed both by Donald Trump and by Paul Krugman, whose policy prescriptions on China Mr. Romney seems to have adopted tooth to tail.
If elected president, Mr. Romney promises, he will, on his first day in office, issue an executive order that “directs the Department of the Treasury to list China as a currency manipulator in its biannual report and directs the Department of Commerce to assess countervailing duties on Chinese imports if China does not quickly move to float its currency.” Perhaps the first day in office is not the right time to make such a decision, and perhaps Congress ought to be consulted.
In the current world economic environment, for the United States to sanction a country for manipulating its currency is like writing speeding tickets at the Indy 500 — worse, it’s like having Mario Andretti issue the citations. Every major economic power in the world is currently engaged in currency manipulation; we call it monetary policy. The Europeans, the Japanese, and the Chinese are engaged in competitive devaluation of their currencies with an eye toward boosting exports. The United States is devaluing its currency as well — that is a large part of what “quantitative easing” is all about — but more with an eye toward spurring domestic consumption than toward boosting exports.
According to the editorial board of the National Review, somehow the economy is just the Indy 500 not to be taken seriously, folks.

Ah, life in the cocoon of Versailles DC. They get cheap stuff at the mall, so suck it up in the Rust Belt. Eat your spinach and apply for a job at Wal-Mart.

The National Review argument is free trade is good because it is free and it is trade. Duh. To do otherwise would risk a trade war.

But why is risking a trade war with China a bad thing? Because the editors' liberal professors in college said that? Or because there's a good quote from Milton Friedman on it?

The fact is a trade war might help our economy.

Blasphemy? Consider the facts.

From Kimberly Amadeo:
The U.S. trade deficit with China was $365.7 billion in 2015  This is a new record, up slightly from last year's record of $343 billion.
The trade deficit exists because U.S. exports to China were only $116.2 billion while imports from China hit a new record of $481.9 billion. The deficit keeps growing because imports are rising faster than exports.
The United States imports consumer electronics, clothing and machinery from China. A lot of the imports are from U.S.-based companies that send raw materials to China for cheap assembly. When they are shipped back to the U.S., they are called imports even though they are profiting American-owned companies. (Source: U.S. Census, U.S. Trade in Goods With China)
I am not saying she is advocating a trade war. But I do use her information to say, let's call China's bluff on this.

We spent $481.9 billion last year for the privilege of selling $116.2 billion in goods to China. We lose a billion bucks a day on this deal.

It seems to me that if we stopped trading with China -- a tyranny -- we would boost our economy and that of our allies by buying products elsewhere, where workers are treated humanely.

We need a new deal. If that means a trade war, so be it.


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  1. It's all about nationhood, independence. This is, after all, Independence Day. We had a trade war with Britain in the lead up to, as well as in the aftermath of, the shooting war. We had a trade war with our former ally, France. The Cold War was a combined trade and quasi-war with communism. And we are in a trade war with China right now, except that, like in Vietnam, our leaders insist on us not fighting, and more importantly, not winning. Sure, there will be hardships as there always are in these things. But freedom and independence come with a price. It looks like the average American is willing to pay that price, and our nobility aren't. Obviously we need either new nobility, or perhaps dispense with the class altogether.

    1. The average American is already paying that price. Which explains Trump.

    2. We are paying the price in jobs now. We'll pay it in higher prices when we start fighting back.

  2. The Surprisingly Swift Decline of US Manufacturing Employment
    by Tyler Cowen on July 2, 2016 at 12:31 am in Current Affairs, Data Source, Economics | Permalink

    There is a new AER paper by Justin R. Pierce and Peter K. Schott, here is the abstract:

    This paper links the sharp drop in US manufacturing employment after 2000 to a change in US trade policy that eliminated potential tariff increases on Chinese imports. Industries more exposed to the change experience greater employment loss, increased imports from China, and higher entry by US importers and foreign-owned Chinese exporters. At the plant level, shifts toward less labor-intensive production and exposure to the policy via input-output linkages also contribute to the decline in employment. Results are robust to other potential explanations of employment loss, and there is no similar reaction in the European Union, where policy did not change.