A Trade Proposal Unworthy of an Economist

Posted by Daniel Ikenson

Just when you have a pretty good sense of who is dishing protectionist nonsense and from where, along comes Robert Aliber, who — according to the byline of his commentary in yesterday’s Financial Times – is professor emeritus of international economics and finance at the University of Chicago.  Et tu, Chicago?

Aliber considers the US-China trade imbalance unsustainable and, because the Chinese government continues to prevent the value of its currency from rising sufficiently, proposes that the United States impose an across-the-board duty of 10 percent on all Chinese imports, which (after 6 months) would ratchet up 1 percentage point per month every month until the Chinese trade surplus with the United States declines to $5 billion per month. 

We’ve heard this tune before — but from politicians who are presumably far less adept at economics than a University of Chicago economics professor ought to be.  Yet, even Chuck Schumer ultimately acknowledged the banality of his (and Lindsey Graham’s) thrice-introduced legislation to impose a 27.5 percent tariff on Chinese imports as a proxy and incentive for renminbi appreciation.

If Aliber limited his argument to the assertions that the bilateral imbalance is unsustainable and that the Chinese government should allow the value of the renminbi to be determined by supply and demand, I’d have much less to quibble with.  I’d still be plenty skeptical that bilateral trade accounting tells us anything meaningful in this age of cross-border investment and transnational production and supply chains.  I’d still break from the implication that balanced trade should be an objective of policy or that it is more important than economic growth. And I’d still remain unconvinced that an increase in the value of the renminbi alone would have much of an impact on bilateral trade flows.  But I’d agree that a market-determined exchange rate would increase the likelihood that investment, consumption, and production decisions would better reflect underlying conditions in labor, financial, and goods markets, and in that regard would be a more useful guidepost for informed decisionmaking.

But Aliber’s proposal — and the numerous fallacies upon which it is predicated — goes well beyond that point, and appears to be the product of something like acute tunnel vision.  He is so fixated on the bilateral trade account that nothing else — including the impact of his proposal on the economy broadly — commands his attention. 

Aliber utters all of the classic fallacies about the insidious impact of China’s currency on U.S. manufacturing; the leverage and sway China allegedly holds over U.S. policymakers, as our banker of last resort; and, how China caused our trade deficit by purchasing U.S. securities.  I disagree with all of those assertions, vehemently, and have explained why in various places, but I want to focus presently on his proposal, which is one of the worst ideas in circulation.

Read the rest of this post »