Last week, the House Ways and Means Committee held hearings on legislation to impose tariffs on Chinese imports. While such action is unlikely, it shows that the political pressure to do something about growing imports from China is increasing. However, emotion rather than economics is driving the agenda.
The only reason anyone cares about China's trade is because it operates within a mercantilist framework. The mercantilists preached that countries should always strive to have a trade surplus and avoid trade deficits at all cost. That is partly because they viewed the flow of gold as central to economic well-being. Deficits led to an outflow of gold, which was bad, while surpluses led to an inflow of gold, which was good.
The Spanish were the best practitioners of mercantilism. When they conquered Latin America, they sent back vast sums of gold to the mother country, for a time making Spain the most powerful country on earth. But it all fell apart within a short time, as the money was simply wasted. And because the Spanish did not invest in their colonies, when the gold ran out, they no longer had any value.
By contrast, the British did not find any gold in their North American colonies. This was a huge disappointment to them. But in order to try and salvage some profit from their asset, they were forced to invest in the New World, creating new industries like tobacco. But, being mercantilists, the British insisted that all trade from the American colonies had to go through London, thereby increasing the cost of American goods and creating ill will that culminated in the American Revolution.
Although many of the Founding Fathers were protectionists, they weren't mercantilists. Rather, they favored protection for the purpose of protecting America's "infant" industries. But it never worked very well. In his great book, "The Tariff History of the United States," economist Frank Taussig concluded that high tariffs did little to stimulate domestic production. This is evident in the fact that the United States ran a trade deficit almost continuously from 1790 to 1875.
A key reason for the trade deficit is that the United States was the China of its day: a place where cheap land greatly reduced production costs, just as cheap labor reduces costs in China. This led to a flood of foreign investment into the United States, especially in transportation technology like railroads, which were the Internet of their day. It is a simple matter of accounting that when a nation is a net capital importer, it must run a trade deficit.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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