Dear China: Thank You For Manipulating Your Currency

Dear China: Thank You For Manipulating Your Currency
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buy from them, and somehow thinking that those higher prices make us better off. That would be like forcing Walmart to stop “Everyday Low Prices” and instead charge “Everyday High Prices” and then thinking that American consumers are somehow better off?

Mercantilism isn’t only bizarre, it’s a guaranteed formula for economic ruin.

In the upside-down “bizarro world of mercantilism” here’s how Trump’s new trade policy will apparently work: China and some other countries allegedly keep their currencies undervalued to the distinct advantage of Americans, who are enriched and made better off by low prices, and to the distinct disadvantage of the Chinese people and other foreigners, who are impoverished and made worse off. To retaliate against that “unfair” outcome, Donald Trump proposes to enact protectionist, mercantilist trade policies to correct that “unfairness.” But those mercantilist policies are actually guaranteed to impoverish America and make Americans worse off. So the faulty “logic” of trade retaliation is: If China and other countries impoverish their people with currency manipulation, we’ll retaliate by impoverishing our people with protectionism. “Fairness” might be achieved by this mercantilist-driven trade policy, but only in the sense that the people of all affected countries are made equally worse off.

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Mercantilism isn’t only bizarre, it’s a guaranteed formula for economic ruin. And that’s why it was discredited by the mid-18th century when it was “eclipsed by the theory of comparative advantage and the associated benefits of free trade developed by David Ricardo,” according to the Princeton Encyclopedia of the World Economy. And that’s why “Britain abandoned mercantilism and its associated trade restrictions in the 1840s” and was no longer taken seriously by economists. Unfortunately, in the world of modern U.S. politics, the sham of mercantilism is still being taken seriously by politicians almost 200 years after it was discredited.

Republished from AEI.

Mark J. Perry

Mark J. Perry

Mark J. Perry is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.

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