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Shenoy’s point is reinforced by economist Tyler Cowen of George Mason University. The neomercantilists blame China’s trade surplus on its policy of keeping the yuan undervalued against the dollar . But Cowen argues that if that policy were to stop, it might not make much difference. Since China has to import parts in order to manufacture its exports (it runs a trade deficit with East Asia), the stronger yuan would enable the Chinese to buy imported components and materials at lower cost. Thus the price of Chinese goods in the United States might not change much, and Americans would still eagerly buy them up.
Cowen also destroys the notion that China is draining the United States of money:
Most of the growth in Chinese exports to the United States has come from switching manufacturing and assembly from other, more expensive, Asian countries. In 1985, China, Japan, Hong Kong, Taiwan and South Korea accounted for 52.3 percent of America’s trade deficit. By 2005, this percentage had fallen to 40.9 percent, in part because of cost savings from buying Chinese.
From 1986 to 1988, Taiwan and South Korea accounted for 60 percent of American footwear imports; China was only 2 percent. By 2001, market positions had reversed; China produced about 60 percent of the total and Taiwan and South Korea about 2 percent.
In other words, Americans are substituting Chinese goods not for American-made goods but for higher-priced Asian goods.
There is no question that we have more stuff, a larger variety, and lower prices thanks to the expansion of world trade. This does not mean all is well in the developing nations. There’s little laissez faire out there—or here—sorry to say. But the remedy is not to harm consumers by closing our market. A better strategy is to strip the ruling elites of their State privileges.
Shenoy disarmingly answers the neomercantilists’ big question: “You say, how are we going to compete with all these other countries? The answer is, of course, you compete by producing goods that were not produced before.”
And because the expanded division of labor, global trade, and competition lower prices, there’s capital left over for the production of goods we couldn’t afford yesterday.
Sheldon Richman is editor of The Freeman, where this article originally appeared.