Wednesday, October 20, 2010

Economic Cooperation vs Trade Wars

Milton Friedman's famous talk on the lessons of the pencil illustrates how the free market price system promotes cooperation and harmony among those with no common interest. In contrast to that is the current chatter among politicians about Chinese currency manipulation and trade retaliation. This type of thinking is illustrated quite nicely in this quote from Cafe Hayek:
If governments fought real wars like they fight trade wars, here’s how the transcript of the communiqués between the leaders of two warring nations would read:

Leader of Absurditopia (A): I say, leader of Stupidia – we demand that you stop occupying that contested strip of land. If you refuse, we’ll have no choice but to shoot our own citizens.

Leader of Stupidia (S): You don’t scare us! That land is ours. And if you do kill some of your own people, make no mistake that we will immediately – and just as cruelly – commence to killing our own people. Courage is our national motto!

(A): Ha! You’re bluffing. But I’m not. I’ve just courageously ordered my troops to mow down in cold blood ten percent of my fellow countrymen. Take that!

(S): How dare you attack you like that! You leave us no choice but to attack us. I am ordering the Stupidian army to slaughter 15 percent of innocent Stupidians here in Stupidia. How do you like them apples?!

(A): You are cruel and inhuman to damage us by killing your people. I hereby instruct all of my fellow Absurditopians to commit suicide! Only then will you nasty Stupidians get your proper comeuppance and we Absurditopians the justice that we are due!

(S): You can’t beat us, you Absurditopian you! Listen up. I’m ordering all of my fellow citizens – Stupidians all! – to commit suicide. We’ll see who emerges victorious!

The Grouch: Why should Americans be upset if the Chinese government keeps the Yuan undervalued? The usual explanation is that China's cost advantage is an artificial government manipulation. But if the Chinese government wants to subsidize the US consumer, why should we fight it? It is the Chinese worker who is being punished by selling their labor for below market value. Devaluing the dollar may raise the level of exports, but punishes the American worker by subsidizing foreign consumers. If a weak currency is an advantage we should devalue the dollar by 75% immediately.

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