David R. Henderson  

Mitt Romney on Mercantilism

Today on the Eurozone Crisis... Eureka! Economic Illiteracy as...
But they [the Chinese] sell us this much stuff [holding his hands far apart.] We sell them this much stuff [holding his hands close together.] Tell me, who doesn't want the trade war? They don't want it real bad. And we've been listening for 10 years from people talking about how we can't hold China to the rules of free and fair trade and if I'm president I will hold them to those rules. And we'll respect each other but we are not going to let them just run all over us and steal our jobs.
This is what Mitt Romney said in the Republican presidential debate on Saturday night. He was saying that the Chinese want to avoid a trade war with the United States more than the U.S. wants to avoid one with China because they have more at stake. But that's false. We benefit as exporters just as they do as exporters, and the measure of the benefit is the producer surplus: the difference between the price obtained and the supply price, the minimum price at which the producer would be willing to produce.

But we also benefit as importers, just as they do. The measure of the benefit is the consumer surplus: the difference between the demand price, which is the maximum price we would be willing to pay, and the price we actually pay.

I have no basis for saying, and neither does Romney, that our consumer surplus from buying Chinese goods plus our producer surplus from selling goods to China is less than their consumer surplus from buying goods from us plus their producer surplus from selling goods to us. In fact, given the tremendous subsidies that Romney alleges (I think, correctly) that the Chinese government gives its exporters, China's producer surplus is probably fairly small.

Romney is preaching mercantilism. As Charles L. Hooper write in a recent Econlib article, "Mercantilism Lives."

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CATEGORIES: International Trade

COMMENTS (13 to date)
Brian writes:

Well if Romney can get China to stop cheating in a way that (unfairly) hurts American producers, I would say that's a good thing even if it hurts US consumer surplus somewhat. There is something to be said for fairness, after all.

david writes:

New pet theory: almost all complaining about economic policy is due to a pecuniary externality of some kind.

Mark Michael writes:

A tangential thought. China keeps exporting more to America than it imports, building up huge dollar reserves. We, in turn, become a bigger debtor nation year after year. Some economist remarked that the US and Europe are steadily becoming massive debtors and the Far Eastern nations steadily becoming massive creditors. It's out of balance and unsustainable, I'd think. Interest rates are so low, the costs to service that debt remains minimal, but what if interest rates revert to more normal levels?

In terms of losing wealth, the Far Eastern nations are more at risk than the West. They hold those electronic IOUs in their CBs. We have/consumed those consumer goods they "sold" to us for our IOUs. We enjoyed an artificially-higher standard of living. They deferred their consumption - with the faith that those IOUs would be redeemable at face value some day. (Will they graciously allow us to "stiff" them at some point in the future - when they decide we can't pay them back - and their dollar reserves lose value? "Send in the gunboats" figuratively speaking somehow?)

China's (and S. Korea's, Taiwan's, Japan's) central bank aids and abets this situation by continuing to amass those dollar & euro reserves. But what if they worried a little about the risk: what if those countries can't service those debts sometime in the future? Like maybe in a couple years? (Say, like Ireland, Greece.) If they were a private money center bank, wouldn't they tell Chinese exporters, "Wait a minute! We don't want any more dollars or euros. They are going to sink in value, reducing their worth to us. And, heaven forbid, at some point they might not even be able to pay interest on that debt. Go find some American & European goods and services to buy to spend some dollars first. Then come back and we'll talk!"

A government-run central bank responds to powerful political pressures, which (even in autocracies) responds to large, powerful special interests. Those want to keep exporting to maintain the status quo: keep workers employed, avoid unrest. But it sacrifices their own narrow self-interest as a bank: prudent lending so it doesn't end up with large amounts of bad debt and sinking-in-value dollars and euros.

I realize it's crazy to say things like, "Maybe government central banks are a key part of the problem and should be phased out," but..is there some way to get them to stop creating these out-of-wack debt relationships?

Ken B writes:

That is very depressing. Not at all uncommon with the Obami but depressing to see it take over the other party too.

Nicolas writes:

I'm not sure why the Chinese government is intent on keeping the costs of my consumer purchases artificially low, but I sure do appreciate the help.

Tyrelol writes:

Bastiat should be required reading in elementary schools.

But the politicians that control our terrible educational system make their living off the seen and not the unseen.

Mark Little writes:

This is so sad. I don't watch these debates. Thanks to David for the review. (He is completely correct or course.)

My hope is that this is just an instance of a supplier responding to a perceived demand. My hope (perhaps in vain; but we can always hope) is that Romney is not truly this ignorant. Bryan is the best one to comment on this--it's within his Myth of the Rational Voter bailiwick.

@Ken B, @Nicolas, @Tyrelol: ditto.

blsdaniel writes:

I'm not sure that being the victim (or is that "victim") in a trade war an firing back constitute mercantilism. It might be stupid, but the world is full of ways of being stupid without being a mercantilist.

Like you, David, I have no idea of the the net effect to welfare is of what China is doing. I'm sure it (and other things) can be hell on the 55 year-old high school grad who used to have a good just on manufacturing. I'm tempted to think that it must be helping China or they'd stop doing it, but commissars and central planners pay attention to things that they can easily count and tend to ignore things they can't, and consumer surplus is in the second category.

Ken B writes:

Just found this http://www.nationalreview.com/corner/287606/conservatives-vs-capitalism-jay-nordlinger

Anon. writes:


The trade war is already going on, and both countries are victims. What is China doing that the U.S. isn't, exactly? The QE programs were to a large extent currency depreciation programs, and subsidies are given out liberally to various (export) industries.

Don Genson writes:

I'm not so much worried about trade as I am the possible political consequences of having a dubious creditor such as China. And we only have to look back to 1956 and what the U.S. threatened to do to our BEST FRIEND...the Brits...during the Suez Canal crisis. The British, the French and the Israelis refused to pull out of the Suez. Eisenhower wanted them to leave. Now the Brits owed us a ton of money after WWII, so we informed them that we would dump their notes if they did not pull out of Suez. Of course, this would have destroyed the Sterling Pound. So what did the Brits do? They retreated.
We did that to our best ally. Now the the same Sword of Damocles is hanging over our head, except this time the sword is controlled by an adversary.

another bob writes:


US consumers buy 100 million televisions from Chinese companies. A Chinese consumer buys 1 copy of Microsoft Office and 100 million Chinese users use pirated copies.

I spent this morning changing firewall rules for a server that received 40,000 attempted root logons from a server farm in Shanghai in the past 12 hours.


Stuart MacLean writes:

Good article. Romney will invoke communism to fight communism.

Romney and his Keynesian advisors say we want 'fair trade'. 'Free Trade' leaves that decision to the parties involved in the trade. If it isn't 'fair', don't trade! (apparently the trade we have is 'fair' or we wouldn't have any trade with China).

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