Sunday, April 10, 2016

Economy: Why The China Trade Haters Are Wrong

(Drivebycuriosity) - What do Donald Trump and Bernie Sanders have in common? They are both against free trade, especially with China. Both claim that free trade with China is hurting the poor in the US. Their argumentation is simple: Unskilled US workers are losing their jobs because people buy Chinese products that are cheaper thanks to low wages in China.  The China trade haters claim that Chinese workers are undercutting American workers and so stealing their jobs.

Trump & Sanders are wrong. Every American benefits from cheap Chinese goods, especially the poor. Imports from China, including apparel, hardware and toys, are reducing the cost of living in the US. And they make many things like smartphones, laptops and other electronics more affordable. These cost savings allow the poor to spend more money for other goods and services - they gain more life quality. Money which isn´t spend for apparel, hardware & Co (because of the lower prices) will be spend for domestic goods & services and will create new jobs in the US - compensating the job losses at least partly.

Free Trade with China - and with the rest of the world - also creates a healthy competition. If US producers would be protected by trade restrictions as Trump & Sanders demand, they would become monopolists - more or less. Then they could hike prices and reduce the quality of their products (lower quality means lower productions costs = higher profits). So the free trade with China not only implies lower prices it also yields a higher quality and more variety. And the competition with China forces the US industry to become more efficient & productive.

Due to the low prices China has a trade surplus meaning that the country exports more goods to the US than it imports from there. China uses these surpluses to buy US government bonds (treasuries) with a value of trillions of dollars (investopedia).  So the Chinese workers are financing the US public deficit and indirectly the US public spending. Without the Chinese treasury purchases the US government would have to pay higher interest rates and maybe reduce the public spending which could cost US jobs.

If the China trade haters will get their will and the US imposes high trade barriers against China (like tariffs and other regulations) they could start a trade war because China would be provoked  to retaliate. In the year 1930 the US implied high tariffs on over 20,000 imported goods (Smoot-Hawley Tariff Act) and started so a trade war with England & France. As a result global trade imploded and the recession became the Great Depression.

P.S. For illustration I used the image of workers in a Chinese toy company.

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