© 2018, Farok J. Contractor, Rutgers Business School
The current debate about trade with China sparked by the Trump administration is uncannily reminiscent of the 1970s, when Japanese companies were deemed a threat to the United States. Phrases such as “Japanese invasion” were used by frightened journalists and fear-mongering politicians. The threat from Japanese imports eventually never amounted to much. American firms responded with competitive vigor, as they usually do. After the 1990s, Japanese companies were no longer foreign bugaboos, and Japan entered a 25-year period of economic stasis, with only a few Japanese companies exhibiting world-class competitiveness thereafter.
The Wall Street Journal has chosen to recently reproduce excerpts from a 1978 lecture at Utah State University by the late Milton Friedman, a Nobel Prize-winning economist, who in his time was lionized as a pundit and advisor to Republican presidents from Ronald Reagan onward. In the excerpt below, I took the liberty of replacing the word “Japan” with “China” and replaced “Japanese” with “Chinese” to reinterpret Prof. Friedman’s pungent remarks on protectionism for the contemporary era.
In effect, Friedman asks: “Who is the sucker in this game?” His remarks below may be read in conjunction with my Friday, April 13, 2018 post, “TEN QUICK FACTS ABOUT US TRADE: Deficits, Dumping, and Discords,” which goes into detail on how the Chinese government recirculates their trade surplus back to the US, investing the surplus dollars in US Treasury instruments.
Notable & Quotable: Friedman on Steel Tariffs
“The dollars that we spend for the steel will find their way back to the U.S.”
Economist Milton Friedman in a 1978 lecture at Utah State University*
Let us suppose, for a moment, that the [Chinese] flood us with steel. That will reduce employment in the American steel industry, no doubt. However, it will increase employment elsewhere in America. We will pay for that steel with dollars. What will the [Chinese] do with the dollars they get for the steel? They aren’t going to burn them. They aren’t going to tear them up. If they would, that would be best of all, because there’s nothing we can produce more cheaply than green pieces of paper. And if they were willing to send us steel, and just take back green pieces of paper, I can’t imagine a better deal!
But they’re not going to do that. They’re not stupid; they’re smart people. They’re going to use those dollars to buy goods and services. They’re going to spend them. In the process of spending them, they may spend them directly in the United States, and that directly provides employment in the United States. They may spend them in Brazil or in Germany or in [China] or anywhere else. But whoever gets them in turn is going to spend them. So the dollars that we spend for the steel will find their way back to the U.S. as demand for U.S. goods and services. You will have less employment in the steel industry; you will have more employment in the industries producing the goods we export. Overall, total employment will not be affected. But overall, the American consumer will be benefited, because he will get the steel more cheaply, and the goods made from the steel more cheaply, than he otherwise would. That’s the benefit to the American consumer.
You very often bring out the logic of an argument by carrying it to an extreme. You know, you could have a great employment in the city of Logan, Utah, of people growing bananas in hothouses. If we had a high enough tariff on the import of bananas, it could become profitable to build hothouses and grow bananas in those hothouses. That would give employment. Would that be a sensible thing to do?
Now with respect to the charge that the [Chinese] government is subsidizing the export of steel. Number one, it’s very dubious that it’s true, but suppose it were true. Then that would be a foolish thing for the [Chinese] to do from their own point of view. But why should we object to their giving us foreign aid?
*Wall Street Journal, March 26, 2018: https://www.wsj.com/articles/notable-quotable-friedman-on-steel-tariffs-1522103318 [requires subscription]