Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Jed Babbin correctly identifies power as one of the goals of Chinese mercantilism
In the June 13 American Spectator (China Plays Reagan to our Gorbachev) Jed Babbin, former Deputy Undersecretary of Defense under George H.W. Bush, correctly pointed out that China is using mercantilism in order to build up its power. He wrote:
Indeed power is one of the goals of mercantilism. I also pointed that out in a commentary that I wrote in December. Here is a selection:...
Babbin was on the right track and almost reached the obvious conclusion that we should enact a WTO-legal scaled tariff to balance trade in order to protect our economic and political future. But then he veered off course. According to Babbin, China just abandoned the mercantilist strategy of accumulating foreign assets in order to run trade surpluses. He wrote:
In reality, the People's Bank of China (PBC) has not stopped accumulating hundreds of billions of dollar assets per year as evidenced by the fact that the yuan didn't stop shadowing the dollar in May. Any short-term improving trend in U.S.-China trade in May was probably due to Chinese inflation, which the PBC is fighting in every way possible, except by ending its printing of yuan to use when buying dollars.
Furthermore, China has not started taking down its barriers to U.S. products. Its government still publishes catalogs that routinely exclude almost all U.S. products from eligibility for purchase by its huge public sector. It still keeps out U.S. meat through a wide variety of subterfuges. It still permits its people to pirate U.S. software, CDs and DVDs, even while it places bureaucratic hurdles upon the sales of the legitimate products. It still places tariffs of about 25% on U.S. products ranging from vehicles to raisins to small bulldozers.
If China has changed policy, it does not yet show up in the trade data published by the U.S. Census Bureau. With Chinese aggregate demand growing rapidly and U.S. aggregate demand stagnant, economists would normally expect the Chinese trade surplus with the United States to be shrinking. But for the last twelve months, China's trade surplus has continued to be higher each month than it was the same month of the previous year, as shown by the blue line being consistently above the red line in the graph below:
Babbin is a defense expert who has correctly identified the power threat of Chinese mercantilist policy. But he doesn't appear to understand how mercantilism works. This causes him to make the mistake of claiming, based upon one item of data which runs counter to all the other available data, that China has changed its policy.
China is still practicing mercantilism. It is still buying U.S. assets. It is still keeping out U.S. products. It is still building up its economic and political power and bringing down our economic and political power. And the U.S. political establishment is still practicing what University of Maryland economist Peter Morici correctly calls "appeasement."
Journal of Economic Literature:
Atlantic Economic Journal: