The real danger of Chinese “competition”

Populist and protectionist rhetoric ignore the real issues of trade

It has been common for economists to tolerate the blather of competitiveness, not only because there are practical difficulties with trying to educate non-economists on comparative advantage and the mechanics of free markets, but also because it is commonly believed that such rhetoric can be harnessed in support of good policies. If I am worried about the large negative externalities posed by global warming, and believe it is in the U.S. or the world’s best interest for America to invest in public energy research, then what harm is there if others believe that such expenditures are necessary to “win” against China?

To quote Paul Krugman: “A government wedded to the ideology of competitiveness is as unlikely to make good economic policy as a government committed to creationism is to make good science policy, even in areas that have no direct relationship to the theory of evolution.” Adherents to the competitiveness doctrine are suffering from a fundamental misunderstanding of economics. It is inevitable that there will come a day when flawed thinking comes home to roost, and when it does, it is likely that more will suffer than just trade policy.

For now, let us consider the most likely victim of the competitiveness doctrine, free trade, and to illustrate the threat, let us take the production of solar panels as an example. China, due to the labor intensity of cell and module assemblage, produces nearly all of the world’s commercial solar panels. Clueless pundits such as Thomas Friedman claim that this is evidence that the U.S. is “losing” in some great race to a green economy. The Chinese, we are told, are the pinnacle of savvy ­— while we blunder about with our boneheaded Detroit automakers, those crafty Asians are eating our lunch with their green manufacturing. Unless we get serious about investing in green energy, our opponents will gain an everlasting edge and relegate our children to serfdom.

Thus is the argument for a range of green policies — increased research spending, production subsidies, feed-in-tariffs, and so on. Perhaps these policies make sense on their own — we could construct some argument (maybe not a convincing one) that such expenditures will raise our productivity or mitigate environmental damage or some such. But justifying these moves on the basis of competitiveness is illogical. The Chinese do not install many solar panels of their own (it turns out that they are an incredibly expensive and impractical method of generating electricity). Instead, the only reason they have built a solar cell industry is because the United States and Europe have created a demand for solar cells through massive subsidies. Were we to end our subsidies, the Chinese workshops would go back to making something else, like plastic toys and electric irons — mundane items that wouldn’t get so many pundits worked up.

If it is so important that we not let our rivals beat us in whatever competition it is presumed we are playing, then we have two realistic options in the face of this solar panel evidence. One is to cut our subsidies for green power until we deem that American industry is strong enough to duke it out with a cheap labor China. But if green investment really does make sense, this would mean sacrificing a good policy to avoid some imagined bad outcome. The other alternative is to treat American solar panel manufacturers as an infant industry in need of protectionist trade policy — we might continue to offer subsidies, but only American-manufactured panels could receive them, or we would handicap our rivals with large import tariffs.

The competitiveness advocates claim that they want us to win the trade game, not abandon it, but suppose it becomes obvious that we cannot “win”? Accepting the competitiveness rhetoric, despite whatever the pronouncements of support for free trade that come with it, is to invite protectionists into the debate. As the Obama administration shifts to populist mode, it is likely that it will be rewarded for preaching the competitiveness doctrine. It is much easier to tell a struggling working class “they took our jobs” than to try and explain that economic performance is a nuanced problem without simple fixes. The rhetoric will also win Obama many friends among the CEO’s at the Business Roundtable — businessmen are comforted by the notion that national economies operate on the same principles as corporations, it lets them believe that their life experience entitles them to debate international economics on the same plane as actual economists. But for those of us who understand comparative advantage, it is time to stand up and put Washington on notice. At best, the president playing with fire. At worst, he actually believes what he is reading from his teleprompter.

There could not be a worse time for us to substitute sound economic thinking with voodoo recipes. So let’s start telling the truth: American living standards are determined almost wholly by American productivity, the Chinese are not stealing your job, and our obsession with competitiveness is both dangerous and wrong.

This is the last in a three-part series by Keith Yost on trade myths.