Me listening to a conversion between two economists on CNBC this afternoon resulted in one of our staff having to suffer through yet another one of my rants on what I view to be THE most dangerous fallacy infecting the thinking of so many American citizens these days: that international trade needs to be somehow monitored and, alas, manipulated by politicians (no less) to ensure some level of “fairness”.
In my own defense, my staff member did provoke me by suggesting that “international trade is of course very important, but it has to work for us”. My immediate response was “there’s absolutely no way there’d be any international trade unless it worked for all parties to the transaction (us included)!” I.e., us consumers simply wouldn’t buy anything from a foreign producer unless it worked for us, just as a foreign producer simply wouldn’t sell us anything unless it worked for them.
I went on to explain that China, for example, can tariff our goods till the cows come home and that that in no way whatsoever would justify us turning around and tariffing a single item of theirs. I described how, in a floating exchange rate world, the government can stay completely out of our business, as the currency markets would correct any and all imbalances.
My patient staff member appeared to listen intently as I explained how if China tariffed every American product by 50%, and we accepted their goods unhindered, it wouldn’t take long before the value of all of those U.S. dollars (that the Chinese accepted in exchange for the goods we purchased from them) would decline in value relative to China’s currency (making our goods cheaper for them) sufficient to entirely offset the effect of the tariff. Or, conversely, it wouldn’t take long before the Chinese yuan would appreciate in value relative to the U.S. dollar (making their goods more expensive for us) to do the same. In which case we’re left simply to exploit each other’s comparative advantages. That is, buy from them the things that they produce most efficiently, while they buy, and invest in, the things that we produce most efficiently.
Here’s Milton Friedman’s attempt: