Reuters recently reported that President Obama will soon sign a bill that places duties on imports from China that are subsidized by the Chinese government. Like many politicians in Congress, he believes that cheap Chinese imports are causing Americans to lose their jobs.
They argue that when China subsidizes their industries, they produce goods at lower-than-market price, and are able to outcompete U.S. competitors who are then forced to cut jobs. In response, politicians assign duties or tariffs to these goods to raise the price back to a level where U.S. industry can compete. It is true that these cheap goods outcompete U.S. direct competitors, but what politicians don’t understand is that if you look at the big picture, they are revitalizing the U.S. manufacturing industry.
Who buys these cheap Chinese imports? It depends on the import. Raw and intermediate goods are largely consumed by manufacturers who use them to create their products. American manufactures want to buy what they need at the cheapest price possible to lower their costs. If the best price is provided by China, the U.S. still benefits, because our manufacturers can use the money they save to expand, hire more people, or pass these savings to consumers in the form of lower prices. It works like a subsidy, except China is paying the bill. This is something we can use in today’s economy.
What happens when Obama signs the bill and the price of Chinese imports are increased? U.S. manufacturers will see their costs rise. This translates into further shrinking of the U.S. manufacturing sector and the loss of more American jobs, exactly what we don’t need in today’s economy.
We also import finished goods from China. Retailers who sell Chinese imports are able to sell their merchandise at low prices, which ultimately benefits consumers. The example that instantly comes to mind is Wal-Mart. Many Americans, especially those in the lower classes, rely on Wal-Mart’s low prices to get by, even more so with today’s economy. Once again, China pays to subsidize their industries, but the savings are transferred to American retailers and consumers. After Obama signs the bill, however, expect the prices at Wal-Mart to jump higher and the American lower class to feel the pain as a result.
As I said before, some U.S. industries are direct competitors to these imports and cannot compete with China’s lower prices. This is true regardless of the subsidies, however, because of comparative advantage, and the gains to the manufacturing sector, retail industry, and consumers far outweigh the costs. Also, as the U.S. industries that suffer from comparative disadvantages shrink and those that benefit from comparative advantages increase, overall U.S. job security rises.
Politicians are not economists. Instead, they excel at blaming foreign countries for their shortcomings. The only way to capitalize fully on U.S./China trade potential is to move away from protectionist policies and support free trade. In the end, the “How dare China sell us stuff we want so cheaply!” argument is proof that politicians just don’t understand trade.
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