For CNN, I'm Cornelius Fudge

Andy Roth of the Club for Growth has the video of Lou Dobbs lobbing missiles at the group and its petition that lined up more than a thousand economists and academics—guys like Tyler Cowen, Daniel Drezner, Gregory Mankiw—against economic protectionism. It's wonderful. Rather than engaging their arguments Dobbs just reads anti-China talking points and calls his enemies "employees of Wall Street."

Some of the transcript:

DOBBS: Well, they should know better, but so should he. The fact of the matter is, 31 consecutive years of trade deficits, a trade debt for this country that is rising faster than an already astronomical $9 trillion national debt.

And what I can't quite figure out amongst these geniuses who are so-called free traders is, why do they think that about a 35 percent to 40 percent undervaluation of the Chinese yuan to the dollar is free trade? Why do they think 25 percent duties in tariffs on American products entering China is free trade?

I'm a little confused by these geniuses. And I hope that maybe they will be glad to explain that to us over the course of these weeks ahead here, so that we can catch up with their brilliance.

SYLVESTER: You know, that's a very good question, Lou…

Fine, it's not exactly like the blustering of mania of Cornelius Fudge. I'd actually take Dobbs more seriously if he blamed the trade gap on dark magicks.

Comments

[mk]

Demagogues like Dobbs don't get where they are by talking to folks like Tyler Cowen.

It's not that they aren't smart enough to talk with them, it's that they are smart enough to know NOT to talk to them, at least in any meaningful way.

[MikeP]

Damn all those countries for having the confidence in the US economy to invest so much wealth into it. And damn the US for having the economy and rule of law that attracts all that confidence.

Would that no one wanted dollars. Would that the US economy sucked such that no one believed that the debt and securities of the US economy was worth the paper it was written on.

Woe is us.

[Hugh Akston]

"They subsidize their agriculture and manipulate their currency!!"

"Next up, commentary from the head of the US Dept. of Agriculture and Fed Chairman Ben Bernanke on what an outrage that is!"

[ChicagoTom]

Can someone who knows more about this stuff than me please help here.

Dobb's quoted comment reminded me of this.
When I was in younger I had an econ teacher who used to talk trade and imports/exports. In particular he used to say that one of the reasons it is very difficult for US automakers to make headway in Japan is that they impose a duty on any imported automobiles making US cars always more expensive than their own cars. So assuming that the quality were the same, the tariffs would make it damn near impossible for US automakers to gain noticeable market share.

Is this true today?

Lou Dobbs seems to making a similar point via Chinese imports. Is he correct as well? If so, how exactly is that free trade?

[Jerry]

By undervaluing the Yuan, China is preventing the real incomes of its own citizens to increase. That's the real sham.

[Cesar]

"They subsidize their agriculture and manipulate their currency!!"

"Next up, commentary from the head of the US Dept. of Agriculture and Fed Chairman Ben Bernanke on what an outrage that is!"

Hugh wins the thread. Yeah, Lou, like we would never do those things.

[MikeP]

Lou Dobbs seems to making a similar point via Chinese imports. Is he correct as well? If so, how exactly is that free trade?

It may not be free trade on both sides. Nonetheless, regardless of what the other party in trade does, you are better off freeing your own trade.

In other words, the ordering of the possibilities from producing the most wealth for you to producing the least is as follows: (1) both parties practice free trade, (2) you practice free trade, (3) neither party practices free trade.

Since only your restrictions are under your control, you should unilaterally free your own trade in order to maximize your own wealth.

[Timothy]

Tom: In cars, not as much anymore. Japan has opened up their market more. I think there are still some tariffs/quotas in place in Japan, though. The US also imposes barriers in the auto market, which is why you see so many Japanese and Asian makers setting up shop in the US: they can get around the tariff by fulfilling the Domestic Content Requirement (something like 80% assembly in the US for cars).

This kind of chicanery is pretty par for the course, but makes plainly obvious the role for organizations like the WTO.

MikeP: That isn't strictly true depending on the relative ability of each party to influence the world price. Consider also that perfectly free trade maximizes total welfare but doesn't maintain itself because a large country can capture rents by imposing some restrictions. Domestic producers gain at the expense of foreign producers and domestic consumers, with some dead-weight loss. Optimal tariff rates will depend on the circumstances (it's like any other optimization problem) and those restrictions cause other distortion in the domestic economy, but total community welfare can rise if you're a large country.

There's actually a lot of good material on trade theory on the web. Heir, for instance.

[Timothy]

OH, I should note, the Government captures some of those rents in the case of tariffs, but all of them go to domestic producers in the case of quotas. Quotas and Tariffs both do the same thing, though: raise the domestic price above the world price.

[Mr. Econotarian]

It is true that China has trade barriers, but exactly how is the US going to benefit by erecting our own trade barriers?

Doing so will only 1) hurt US consumers and 2) make it more difficult to encourage China to reduce their trade barriers.

The Yuan value isn't a serious issue. There are few industries that establish production in China based on a 20%-30% gain, they set up factories there when there is a 1000% gain.

I suspect the Chinese government is barely in control of the Yuan value beyond keeping inflation from going wild given all the economic growth there, and the fact that they have inflation somewhat control at all is a macroeconomic miracle that few other developing countries have mastered.

Here is what the Index of Economic Freedom says about China on trade:

"China's weighted average tariff rate was 6 percent in 2004. China has reduced its non-tariff barriers as a result of implementing its WTO protocol of accession, but the government continues to use quotas, import bans, burdensome licensing and regulatory rules, export taxes, and sanitary and phytosanitary restrictions to protect its economy. Issues involving the enforcement and protection of intellectual property rights also add to the cost of trade. Consequently, an additional 20 percent is deducted from China's trade freedom score to account for these non-tariff barriers."

Although at 68%, China's Trade Freedom score is actualy better than the world average.

[lunchstealer]

God damn it. The snackstealer has been playing his "Harry and the Potters" and "Draco and the Malfoys" CDs nonstop for a month now. I finally get that crap out of my head, and you have to go and get "Cornelius Fudge is an Ass" stuck back in my head.

That's it, Weigel, this is war.

All I can say to that is "Tom's Diner" by Suzanne Vega.

Doot doot dooo dit doot doot dooo dit
doot dit dooo dit doot da dooo dit

I wish you hadn't made me do that.

[Warty]

I like the way he sneers at the "geniuses". Stupid demagoguery just wouldn't be complete without a helping of anti-intellectualism.

[Timothy]

I should also note that I am pro-free as possible trade, especially with under developed or small countries who can only be hurt and often severely by trade restriction...but given that governments are likely to persist, I think we need to make sure that the arguments we make are pretty solid as opponents are likely to bust out, "NUH UH!" a lot of the time.

But, when basically every economist on the planet agrees that freer trade is good and that free trade is the best ultimate goal, there's probably something there :-).

[MikeP]

Optimal tariff rates will depend on the circumstances (it's like any other optimization problem) and those restrictions cause other distortion in the domestic economy, but total community welfare can rise if you're a large country.

Except for idiosyncratic or pathological cases, I don't see how this can possibly be true.

Have you got more of an argument than pointing to a website with a big ad saying "AMERICA IS NO LONGER COMPETITIVE" on the top?

[Lost_In_Translation]

OMG, the beef industry will collpase because of cheap Chinese meat.

That must be why the fishing industry in the US was so thoroughly destroyed by Chinese cheap fish....oh wait...

The Chinese Yaun is officially undervalued, but only as long as China thinks it can maintain a high level of growth. Once internal industries start to mature, China's only bet will be to increase the value of the yaun or let their economy overheat.

[Lost_In_Translation]

Also, I thought China was only able to keep the yaun in check by plowing billions into buying US Dollars. That could be wrong.

[Mr. Nice Guy]

Over at another thread some folks are denying the consensus of Phd's on global warming, so I'm going to exercise my right to deny the consensus on free trade here ;).
I'm no economist (boy, that's a set up for some good ol' fashioned snark to come), but anyone with a memory can remember that all these experts were saying that if we passed NAFT (for example) the magic of free trade would occur and we would have a lower trade deficit. And well, that did not happen did it?

[MNG]

NAFTA

[highnumber]

Damn you, lunchstealer!
What did I do to deserve that?

[andythebrit]

I'm not an economist either, but:

1. The yuan is artificially 40% below the dollar.

2. If the yuan rose to its real level, Chinese goods would get 40 percent more expensive.

3. Have you bought anything lately that wasn't made in China? How does your boss feel about giving you a 40 percent raise to make up for you higher cost of living?

[Timothy]

MikeP: Having focused on trade issues when I was in college, yeah, I have a point: The economy is more complicated than you might like to think and a decent understanding of trade theory helps make solid arguments rather than the false statement that lowering your trade barriers always makes you wealthier as a nation. It doesn't, it can, but it doesn't always. Despite their advertisements, they actually have good course materials on trade theory.

It's hard to explain this without a graph, dude, but think of it this way: If your economy is sufficiently large in whatever good, corn for instance, that you can influence the world price, it is possible for you to raise internal welfare by capturing rents from the rest of the world. That is, the welfare gained by domestic producers is greater than the loss to domestic consumers and the DWL from the tariff. Here's a quick explanation of optimum tariffs. It's actually a really good summary.

Short version: global welfare maximized by free trade, domestic welfare can be increased through restriction under some circumstances and therefore perfectly free trade between large nations isn't a self-sustaining equilibrium.

[Timothy]

And just in case a guy at Seoul University isn't, you know, impressive enough for you, here's the dude's CV.

http://gias.snu.ac.kr/wthong/vitae/profileeng.htm

[lunchstealer]

Oh, and Dan T would call me remiss if I didn't point out that Lou Dobbs works for a private company not the government, so libertarians should be happy that the free market is at work.

Just so everyone knows.

Although I will use the equally nongovernmental resources of H&R to point out that Lou Dobbs can suck it.

[Neu Mejican]

MikeP,

Have you got more of an argument than pointing to a website with a big ad saying "AMERICA IS NO LONGER COMPETITIVE" on the top?

As your are someone who uses CATO links in a pinch, you might be careful throwing around accusations about credibility this way...

Just saying...

;^)

[Neu Mejican]

Today is a typo day...

Your = You're

[MikeP]

Timothy,

Okay. I buy that if the US economy operates as a block it can wield monopoly or monopsony power to try to skim a bit more of the international surplus. But I doubt that this power is that evident in practice. In particular, if the experiment could be run a hundred times in today's US, could the US actually succeed in generating more wealth than free trade based on this theory even one time? Note that the experiment starts with a bill in Congress.

And how much is the actual usable price effect of US buying and selling on the world stage? The US is a large economy. But the rest of the world is large, too, and it's only getting larger: Many would jump at the chance to skim some of that "optimal" tariff for themselves.

[Mike Laursen]

31 consecutive years of trade deficits

You'd think that our having thrived through thirty-one years of trade deficits might spark the thought that maybe trade deficits don't matter that much.

[MikeP]

Neu Mejican,

I realized after I wrote that that some sites don't have too much power over the banner ads they show. It was just striking given what I was going there for.

Does Cato run prominent ads that run so counter to their position?

[Neu Mejican]

MikeP,

Does Cato run prominent ads that run so counter to their position?

The problems with CATO as a source is the lack of tolerance for dissenting views, so I doubt it.

[jh]

When I was in younger I had an econ teacher who used to talk trade and imports/exports. In particular he used to say that one of the reasons it is very difficult for US automakers to make headway in Japan is that they impose a duty on any imported automobiles making US cars always more expensive than their own cars. So assuming that the quality were the same, the tariffs would make it damn near impossible for US automakers to gain noticeable market share.

Is this true today?

Lou Dobbs seems to making a similar point via Chinese imports. Is he correct as well? If so, how exactly is that free trade?

Chicago Tom, tariffs are a tax levied by a government on its citizens for purchases of foreign goods. These taxes, of course, reduce demand for the goods. However, if the exporting country retaliates by imposing a similar tax upon its own citizens, it hurts both its own citizens and the citizens of the foreign country being retaliated against.

Unless you're a good little statist who views all taxes as good things because it helps good government help even more by allowing even more good programs, it is best to unilaterally drop all tariffs, and try to persuade the foreign government of this logic.

[jh]

I suspect the Chinese government is barely in control of the Yuan value beyond keeping inflation from going wild given all the economic growth there, and the fact that they have inflation somewhat control at all is a macroeconomic miracle that few other developing countries have mastered.

Mr. Econotarian, the Chinese government has complete control over the inflation rate, because inflation is caused by the government printing money faster than the growth of the economy. Read Milton Friedman on this subject. Slow down the money printing presses, slow down inflation (with a lag to account for people realizing this slowdown is happening).

[MNG]

"31 consecutive years of trade deficits

You'd think that our having thrived through thirty-one years of trade deficits might spark the thought that maybe trade deficits don't matter that much."
You might be right that they don't matter much, but this argument sure won't prove it. It's analgous to saying "that guy has had a fever for ten days but look, he's still working and stuff, so maybe fever's don't matter much." Maybe we're doing ok despite our trade deficits.

[MikeP]

Timothy,

I went ahead and browsed through the text found at your first link. I note that the arguments posed there against the practice of optimum tariffs are quite extensive. So you are likely fully aware of the practical points I raised in my reply above. You may well agree with them.

So thanks for the pointer to the interesting theoretical case for tightly targeted and limited protectionism. Nonetheless, given that I dismiss antitrust law as unnecessary and that trying to capture monopoly surpluses for a nation has got to be much more difficult than for a firm, I will remain unconvinced that its ever actually profitable to the economy.

[MikeP]

Maybe we're doing ok despite our trade deficits.

In actuality the trade deficit tracks very well with economic growth. The trade deficit drops significantly when the economy goes into recession.

And it couldn't be any other way! After all, the trade deficit is nothing but the investment surplus with a different sign. Foreigners want to invest in the US economy when the US economy is doing well. To do that, they need dollars. To get dollars, they provide the US with goods and services.

For Neu Mejican's amusement, let me quote a Cato article...

By almost any measure, America's economy has performed better in years in which the trade deficit rose compared to years in which it shrank. During years of rising deficits, the growth of real gross domestic product averaged 3.2 percent per year, compared to 2.3 percent during years of shrinking deficits. If trade deficits really are a drag on growth, why does the economy grow so much faster when the trade deficit is getting bigger?

[Lost_In_Translation]

jh,

but we're talking comparative value of currencies and for the value of the dollar to remain constant to the yuan, wouldn't some intervention have to occur directly for each currency to remain pegged, otherwise, people would establish an external exchange rate irregardless of the OFFICIAL exchange rate. Look at Zimbabwe, they institute an official exchange rate, but in reality, people exchange it at much higher rates, attempting to rid themselves of the local currency for dollars.
China, to prevent this, must be taking enough dollars to put in their treasury to make up for their increased productivity and demand for their products. Surely the yaun pegged at 8.x : 1 is not simply due to the amount of money printed by the government....

[Son of a!]

As someone once pointed out to me, I have an enormous trade deficit with Wal-Mart. For years now, they've been importing goods into my apartment, and my exports to them are practically nonexistent.

This will end badly.

[More on \"economists\"]

I didn't bother to click through, but I've probably discredited half the people on that list, assuming overlap between the current "economists" and those who signed another letter.

[Jerry]

people would establish an external exchange rate irregardless of the OFFICIAL exchange rate

Where? In China? In Zimbabwe? Good luck dealing with the penal system of these governments.

[Hugh Akston]

I'm confused as to why trade deficits are bad things.

From what I understand, trade deficits are when we import more goods than we export, in terms of national production. But isn't the point to get the best quality for the price, regardless of nation of origin?

[jh]

Lost in Translation: I was responding to someone stating, incorrectly, that the Chinese government has no control over inflation. The comparative value of currencies is related to which government is running their printing presses at the more inflationary rate, unless the government tries to fix the exchange rate by fiat (which results in black markets and other devices to establish a real world relative valuation).

[Mr. Nice Guy]

"If trade deficits really are a drag on growth, why does the economy grow so much faster when the trade deficit is getting bigger?"
Wait a minute MikeP. I follow you that the trade deficit empirically tracks the economy (I would ask which indicators of the economy though, there are dozens people use). But couldn't that just mean that when we have more money as a nation we buy more goods (foreign and domestic)? You're not saying that the trade deficit is a cause of the economy doing good are you?

[Mr. Nice Guy]

If when we had more money (economy getting bigger) we bought more domestic stuff relative to foriegn stuff perhaps our economy would have grown even more than it did with us spending more of our largesse relatively on foriegn stuff.
I'm not arguing this is empirically the case, I frankly don't know. But the mere fact that the economy often is doing well when trade deficits are higher does not automatically prove they are good for the economy.

[MikeP]

You're not saying that the trade deficit is a cause of the economy doing good are you?

Nope. It is an effect of the economy doing well.

My favorite take on the trade deficit comes from looking at what the comparative advantages of the US are. The US has comparative advantages over most of the globe in technology, in research and development, in knowledge.

But the greatest comparative advantage of the US is in productivity itself. The US is the most productive nation on the planet in worker-hours. Not only that, but the American economy is better at turning ideas into sellable goods and services than any other nation.

So if you are a foreigner looking to buy the best product America has to offer, you buy American companies or make other investments in the American economy. It is unfortunate given that people worry about the trade deficit that what passes across the national border in this case are a bunch of pieces of paper. Those pieces of paper are not even neutral in the accounting. They are trade deficit.

[MikeP]

But the mere fact that the economy often is doing well when trade deficits are higher does not automatically prove they are good for the economy.

I agree. The trade deficit is mostly uninteresting and not in and of itself indicative of economic health or distress. It is only the almost universal impression among the media and especially among idiots like Lou Dobbs that makes it worth examination in a purely defensive maneuver against protectionist demagoguery.

And when you really look at it, lo and behold, the trade deficit tracks with economic health, not with economic distress -- and for very sound reasons the US should be happy about.

[Tokyo Trader]

Lost,
China, to prevent this, must be taking enough dollars to put in their treasury..
Yes, in order to maintain a fixed low value, China has to keep selling Yuan and buying foreign currencies. Apparently these amounts have built up to one trillion dollars as of the end of last year. If they come to want to unwind this position they will have to either let the currency float or increase the fixed rate of the Yuan. If, as some estimate, this real market value is as much as 30% higher, then at unwind China could be recognising a loss of around 300 billion dollars.

Although a lot of the talk about this policy revolves on the impact on manufacturing industries but surely the biggest issue is this loss that China will take. Effectively they have been making a massive cash giveaway from the Chinese people to anyone buying these underpriced Chinese goods in the rest of the world. It's clear this isn't perfect free trade and that the policy probably distorts the market from its most efficient distribution. Still, we should recognise that country getting "hammered" is not the US. It's China itself.