THE BIG LIE I - WORLD TRADE

There are a lot of big lies out there, but the one I want to talk about today is the lie that says a country can increase its standard of living by buying cheap stuff from places where the standard of living is lower. This lie is usually defended under the banner of “free trade”-- the benefits of which are taken to be well established and proven. Actually, this defense is bogus. Trade among nations with different standards of living ultimately has a leveling effect. The lower standard of living goes up, and the higher standard of living goes down.

The classical notion of free trade is that nations can benefit by concentrating on the production of goods with respect to which they have “comparative advantages”. The classic example -- given by David Ricardo -- is trade between England and Portugal. Since the cool, damp weather of England is hospitable to sheep, and the warm, dry weather of Portugal is hospitable to grapes, both England and Portugal will benefit if England produces wool and Portugal produces wine, compared with the situation in which both countries try to produce both commodities themselves.

In situations where nations have true “comparative advantages” – such as location, climate, or natural resources – this is no doubt true.  Both can benefit from expanding production of the product with respect wo which they have a comparative advantage  (forgetting, for the moment, the cost of transportation).

But what does any of this have to do with the modern world.  In particular, what does it have to do with China?

China is located nowhere near its primary export markets. Its climate is highly variable, and not particularly suited to the production of one thing or another. What’s more, China is notoriously poor in energy and many other natural resources. So what does it have going for it?

Well, despite several decades of Communist pretense, China does have a centuries-old tradition of trade. Just travel around Asia and you’ll see what I mean. Everywhere you go, there are Chinese (and Indian) traders descended from long lines of Chinese (and Indian) traders. Second, China has a command economy that can allocate capital quickly to take advantage or perceived opportunities. Third, China has an enormous pool of unemployed and underemployed workers who are used to an abysmally low standard of living.

All of these factors are necessary in explaining China’s recent economic ascent; none is sufficient standing alone. But it also needs to be pointed out that none of these factors – least of all a large pool of impoverished workers – can be called a “comparative advantage” in the classical sense. A “comparative advantage” in the classical sense is not diminished by its exploitation. England does not get less rainy by producing wool. Portugal does not get less sunny by producing wine. But a pool of impoverished workers? Over time, it will be diminished as people are put to work. As their standard of living rises, the “comparative advantage” of their poverty will be lost.

And what about the trading partners that have benefitted from that poverty?   Even assuming all else is equal -- that they have traded goods and services -- whether in raw materials, technology, or agricultural commodities -- of equal value, their benefit will be lost.  But to the extent these countries have run trade deficits with China,  their export has been debt. 

Debt is a promise to suffer a lower standard of living tomorrow in exchange for enjoying a higher standard of living now.

This is the trade the United States has been, and still is, engaging in.