## Thursday, June 06, 2013 ... //

### Trade war: Chinese solar panels vs EU wine

Business Week and many other news outlets tell us about another worrisome development in a possibly looming trade war between the EU and China (or EU and the rest of the world).

Some EU apparatchiks have decided that China is selling solar panels below cost so they imposed 11.8% tariffs on them – but this fee is meant to grow to 67.9% within two months. Holy cow. China is clearly going to revenge. At this point, they are preparing actions against the European wine. The French who believe that they produce some of the best wines in the world aren't happy but it's their own fault, to a very large extent. And of course that the Chinese investigation of possible subsidies for the European agricultural products should naturally end up with the "guilty" verdict: the European agriculture is subsidized and manipulated with from A to Z. Needless to say, the wines were only picked for symbolic reasons; things would become tougher if China began to target Airbus aircraft, for example.

It's truly concerning to see that among the Chinese communists and the European Union officials, it's the latter who are much more fanatical, unhinged anti-market Mujahideen who don't hesitate to put our continent's and the world economy's health (and perhaps the global peace) at risk whenever they decide to pursue their sick anti-market policies. China says that now, during these trade conflicts, Europe must recognize its decline. It may sound tough but I completely agree with that. If Europe is becoming uncompetitive etc., and there are probably good reasons for that (to a large extent, it's someone's fault, the fault of some very bad policies), it is just completely wrong to try to mask this fact by spitting on others.

The EU "leaders" have already distorted the market conditions so brutally that it may be hard to decide what is actually "normal" and "fair" in the business relationships between Europe and the rest of the world. Incidentally, India and others are still not paying the ransom that the EU imposed upon the foreign airlines operating in Europe and India and probably others are readying reprisals. Not too good.

But let's return to the topic of the tariffs for solar panels.

First, under normal market conditions, there should be no tariffs. If China is helping its products by dumping prices, it's good for the consumers – most of us. Every company – and China is a very large company if you view it in the right way (and some communist policies are its inner issue – every company has the right to organize itself in a way it prefers) – has the right to run campaigns and offer discounts in order to promote its products. It's a completely normal part of the competition. Such a dumping isn't for free; it costs something. The possible benefits include an advantage over competition (especially if the competition can't afford to generate losses or debt, not even temporarily) but this outcome isn't guaranteed. It makes no sense to regulate such things. Dumping and similar things help the consumers to test products they wouldn't otherwise try – and all these things help to make the markets more efficient and consumers more satisfied.

We may find it problematic if a very large "company" such as China, with giant cash reserves, is using dumping prices to prevail in the long run. But whether you like it or not, this extra power does come with the cash reserves. The Chinese have behaved more responsibly in fiscal matters and their greater ability to test the resilience of their competition by dumping prices is one of the prizes you win if you manage to produce savings instead of debt. The converse holds for Europe and its debt-creating policies, of course. So don't whine about it, EU commies and populists: this comparative disadvantage of Europe is your fault.

The tariffs on solar panels are even more insane if you realize that the EU apparatchiks have claimed that "renewable" energy sources were a good thing; they even introduced a huge system of subsidies for these economically unfeasible energy sources themselves. If they were a good thing, they should enthusiastically thank China for sending us solar panels – especially cheap enough solar panels. But quite suddenly, the desire of these officials to irrationally promote excessively expensive "renewable" energy sources is beaten by another hardwired far left-wing instinct, protectionism, and this explosive mixture can't lead to anything good.

China has the unquestionable right to revenge for the disgusting, anti-market harassment launched by the EU officials and start to harass exporters who are sending stuff to China by comparable policies. Europe is the side that started these annoying steps; the EU is the Adolf Hitler of this new war if one is getting started. But do we really want such a thing? Do we want to lose the right to buy cheap foreign products? Do we want our producers to lose the option to export their products to whole and very important parts of the world or to any foreign country?

Do we understand and do the EU apparatchiks understand what this kind of protectionism does to the continental and world economy?

In Europe, the market for many things has been distorted by many illogical and pathological interventions so that sometimes you no longer know what is the actual price of many things. (These things – multiple prices that have nothing to do with each other – are even worse in countries like Argentina, a Latin American visitor recently assured me.) Some imported products are twisted by heavy tariffs. Some products are made cheaper if they agree with some pseudoscientific, ideologically driven criteria of "fighting against the global warming". Others have already been made more expensive with the same excuse, because their production or consumption "contributes to the global warming".

Couldn't we just eliminate all this mess? All this stuff is a road to hell. Every billion dollar that you redirect using these ad hoc regulations is potentially a billion that has been stolen or used for criminal activity according to someone else. You just shouldn't behave that these things can be done routinely.

A trade war may start because of any product but it's no coincidence that products whose prices have been manipulated with – using tariffs, carbon taxes, carbon credits, and similar things – are the most likely products to lead to a trade war because people (and nations) simply can't possibly agree about the right extent to which the prices should be manipulated, subsidized, increased by tariffs and carbon taxes, and so on. And even the same people – in this case the shameful EU apparatchiks – aren't ethical enough to stay consistent in their principles, in their methods to manipulate all these prices, as their sudden opposition to cheap solar panels proves.

Let me tell you once again what is the right extent to which prices or air tickets, solar panels, and hundreds of similar products and services should be manipulated with by tariffs, carbon fees, carbon taxes, carbon credits, and similar fudge factors. The right extent is zero. Everything else is a crime and if the ongoing row will result in a full-fledged trade war with China (or a greater bloc of countries), all the EU apparatchiks and global warming alarmists and protectionists and similar left-wing garbage people deserve a heavy punishment, at least a life in prison. The Old Continent can't afford to let such people escape unpunished.

And that's the memo.

#### snail feedback (65) :

Let me tell you once again what is the right extent to which prices or
air tickets, solar panels, and hundreds of similar products and services
should be manipulated with by tariffs, carbon fees, carbon taxes,
carbon credits, and similar fudge factors. The right extent is zero.
Everything else is a crime and if a trade war will result in a trade war
with China (or a greater bloc of countries), all the EU apparatchiks
and global warming alarmists and protectionists and similar left-wing
garbage people deserve a heavy punishment, at least a life in prison.
The Old Continent can't afford to let such people escape unpunished.

Spybubble pro

I can't wait for these people to discover that "solar panels" are of no use after 5 years.

"Climate change" will be blamed for the failures, and environmentalists will claim that we need to "ramp up" renewable sources so that renewable sources can be used at all.

Think of how easy it would have been for Soviet Communists to take the EU some years ago if the EU was as stupid then as it is now.

The irony in this is breathtaking. Had solar power not been subsidized with the public purse, directly and by mandating that public utilities purchase solar power that they did not want, this would not be an issue at all. One wants to cry.

It's clearly a threat of economic war from France. François Hollande wants the 27 EU countries to meet in order to come to a "solidarity of point of views", he wants a "principle of reciprocity and justice in our trades with China". Shouldn't he have organize this meeting *before* taking this shocking decision ? Duh!...

Dear Shannon, your glorious leader is a great warrior against the Muslim savages of Mali and I love France and blah blah blah. ;-)

But if I were in the Czech government, I would probably try to maximally use the kind offer of the Chinese government to either negotiate individually with the EU member states; or view Germany as the leader.

France looks like quite a time bomb here. The living standards and welfare etc. are amazing and, in my opinion, pretty much unsustainable. The fall may be rather dramatic.

There are lots of extra francs or euros that France is getting from some inertia and its former special status - and various kinds of protection. Take this trivial example, the champagne. No one else can sell champagne. No other agricultural producer has this kind of a powerful protection of the brand and the extra income that follows from the trademark.

Imagine that the French agriculture is stripped of subsidies - as it should be - and has to compete not only with post-socialist Europe but perhaps even Africa and other places. And go on and on. Is there some reason left that the French should have substantially higher living standards than the average Chinese, for example? The living standards in China were kept rather low which helped China to accumulate reserves and bonds of others and so on and it seems that China is going to apply and exploit these accumulated powers.

Needless to say, Czechia critically depends on exports so a trade war is an extremely bad news for us (which doesn't mean that there are tons of protectionists in Czechia who scream that they don't want the Polish food to come here, and so on: they exist and they are very loud). This means that a competent politician ultimately knows that this is a battle in which we just can't afford to side with anyone who promotes a trade war. We may prefer to leave the EU and switch to a soft confederation with China, in fact. ;-)

The screaming about reciprocity and justice, when it comes to protectionism, is insanely comical from the EU - and French - officials because the EU is one of the main sources of tariffs and other barriers of free trade in the world. All these recent conflicts were started in the EU.

There is a proverb :" Gods turn into a fool those they want to destroy".

I just heard today that since 1982 the greek government provided pensions for over 300.000 greek ethnics refugees from the soviet and egyptian rule, about 5000 euros a year each when they never payed a cent into the funds. That comes to 1.5 billion a year and 45+billions over the thirty years from then. People in government are fools wasting our money while we are fools voting for them :(.

Exactly. The price of the solar electricity is multiplied by a factor of 3-6 just in order to support the renewable sources. This means huge subsidies that the taxpayers in the EU - and the West in general, I guess - have paid to the solar industry. These subsidies were being justified by the claim that it's great to have lots of solar panels, to get energy from them, to allow them to be cheaper.

Now, when someone else is doing exactly the same thing, and in fact, paying the subsidies from his pocket - which should obviously be a better choice for us if we were rational and consistent - they scream and impose tariffs to make the (imported) solar panels much less affordable.

In isolation, one may invent various stretched ideologies in which one policy (like subsidies for solar panels) is "justified" by something. But when one compares these things, it is obvious that there exists no logical framework in which the steps are defensible. The combination of these subsidies and trade wars is just an insane absurdity regardless of one's priorities about global warming, trade, or anything else.

These absurdities are an irreducible symptom of socialism, the desire to liquidate the well-defined, market-dictated prices. Ota Šik, a Pilsner economist and a key economist behind the 1968 Prague Spring, found a planned coal mine and a planned power plant. The coal mine produced exactly the coal that was burned by the power plant and the power plant consumed all the coal from the coal mine. Everyone was happy while all this activity was completely useless - the salaries for the people were pure loss. And the real world is more complicated so it's not just about having pairs like that: there can be loops that prove that some segments of the economy are absurdities. It's impossible to trace them when the prices aren't well-defined and more or less spatially constant.

If a solar panel may be worth $50 or also$150, depending on how you look at it, which paragraphs you apply, and so on, it's obvious that the difference $100 may be either stolen by someone who permutes the solar panels along the appropriate paths, or viewed as an amount that was stolen from someone else. At any rate, this dependence of prices on some ad hoc paragraphs is a huge problem, and the stronger the dependence is, the bigger problem we face. reader Luboš Motl said... Dear Luke, well, being a Chinese citizen i.e. individual may suck for various reasons. But this is really an internal issue of China that has no impact on the evaluation of the external behavior of China and its power to influence the rest of the world. However, I disagree that the building of apartments, trains, and roads in China is a waste of money. And I doubt it's possible that the Chinese government could "fail to pay back the loans" because that would mean default, wouldn't it? What do you exactly mean? It doesn't matter whether a road is profitable in any sense. The government has borrowed money so it has to return it. reader Shannon said... Here Lubos, a present for you of my glorious leader ;-) reader Luke Lea said... The Chinese people are happy? There are hundreds of thousands of public protests a year, almost all of which are simply ignored by the government and their leaders imprisoned or fined. As for repaying those loans, every bank has a printing press and a red phone to central party headquarters. If people want their money out and the banks don't have it on hand they get permission to print it. You think I exaggerate? Anyway, you know where that leads. The decision by Western leaders to free up trade and investment with China twenty years ago with no strings attached is one of the most profoundly destabilizing decisions in modern times. Along with mass immigration and a failure to adjust the workweek to compensate for gains in worker productivity brought about by new labor-saving technologies, it is undermining real hourly wages in all the developed world. I appreciate you libertarian sentiments in theory but in practice this is not going to end well. reader Luboš Motl said... Dear Luke, there is over a billion of people in China so the number of protests you quote isn't that large in the relative comparison. You surely don't want to suggest that the decision to free the trade with China was bad for the economy, do you? Especially the Chinese economy? In the last 30 years, the average annual GDP growth rate in China was 10%. Note that 1.1 to the power of 30 equals 17. That's the factor by which the China's GDP sort of grew in 30 years. Seventeen-fold. I have absolutely no idea how you want to blame the poverty of other countries on China's growth. It makes no sense. Someone's work and getting wealthier doesn't imply someone else's getting poor. It implies getting wealthier as well for business partners; and no change for people not involved in the transactions. Yes, Chinese workers and companies are competitors for others. They have the right to be. Everyone else has the same right, too. Economic freedom and the freedom to trade is a part of freedom. There are other freedoms absent in China but one can't really fight for the other freedoms by reducing the economic freedoms for the Chinese. reader AJ said... Perhaps this TED talk is of relevance: Hans Rosling: Asia's rise -- how and when http://www.youtube.com/watch?v=fiK5-oAaeUs If you don't have the 17mins for the above, then this is also neat: Hans Rosling's 200 Countries, 200 Years, 4 Minutes (aka "The World at 400ppm" :) http://www.youtube.com/watch?v=jbkSRLYSojo reader AJ said... I'm still ticked at the EU for banning our Canadian seal products. All because they have cute pups. reader Shannon said... In France any foreigner can get a pension of a minimum of 8907.34 € per year even if you have never worked in France. reader Gene Day said... No, no, no, Luke, China is not one of the most corrupt societies on the face of the earth; there are far, far worse. Of course corruption is a big problem in China but comparing it with countries such as Iran or Pakistan (I deliberately ignore here Afghanistan and all the other tribal nations, which are a story in themselves) is a huge mistake. The PRC leadership is battling corruption as a top priority but, of course, without a free press and a free internet they will be unable to reduce corruption to the level that we experience here in the west. The desire to restore China to its former glory is deeply ingrained in the Chinese psyche and its leaders are seriously aiming to do just that. The biggest obstacle to their fulfilling their dreams is corruption and you can bet your ass that the PRC leaders know it very well. The question is whether they will risk opening up communications or whether they will fail in their aims. Predictions regarding China are pure guesses, in my view. I would add that not all of Europe is in the angel camp; there is great variability in the corruption level there. Your link is to factsanddetails.com and represents the opinion of one man, Jeff Hays. He writes an enormous amount of material but but he is not a deep thinker or careful analyst. You ought to read his stuff a bit more critically. reader lukelea said... Sorry, Gene, but factsanddetails.com does not represent the opinion of one man. In fact I have no idea what Jeff Hays opinions are. It is an encyclopedic compendium of reputable sources about all things Chinese. reader lukelea said... This is a complicated subject so just a couple of points. Of course the Chinese are better off now than they were in the days of Mao, and there is no question that freeing up the Chinese economy is the reason why. However, according to the author of Capitalism with Chinese Characteristics more progress was made at a faster clip in the ten years before the opening to the West than in the decades since, during which time the welfare of two-thirds of the Chinese population living in small towns and rural areas has actually declined by some measures. As for China having a "right" to trade with the US and the EU I would say that is up for the US and the EU to decide based on what is in the interests of their peoples. Theoretically it could be in their interests, but only if they are prepared (and know how) to adopt measures to offset the redistribution of income between capital and labor such trade brings about, whose magnitude please note is many times the size of the actual gains of trade themselves. (I analyze that here.) Absent such measures the general welfare of both of these areas is bound to suffer significantly. Unless you don't believe that all people are roughly the same in their ability to experience pleasure and pain or you deny the principle of the declining marginal utility of income. This is all standard textbook neoclassical economics. reader anna v said... the proverb still applies reader Luboš Motl said... I can't believe it, Shannon. This is close to the average Czech salary. What do you mean by "any foreigner"? reader Smoking Frog said... The coal mine produced exactly the coal that was burned by the power plant and the power plant consumed all the coal from the coal mine. Everyone was happy while all this activity was completely useless - the salaries for the people were pure loss. How does that make the salaries "pure loss"? The power plant wasn't giving away the electricity free, was it? reader Shannon said... Yep. If you earn less than 8000 Euros per year, if you are at least 65 years old (or 60 but unfit for work) and if you are authorized to live in France (or in its overseas territories) then you only have to apply to the Allocation de Solidarite aux Personnes Agees (ASPA). Interested? ;-) http://www.defrancisation.com/immigration-une-retraite-garantie-etrangers-n-ayant-jamais-travaille-en-france/ reader Smoking Frog said... OK, but how hard is it to get to be "authorized to live in France"? reader Smoking Frog said... Lubos, you're treating a country as if it were an individual, i.e., an entity presumably in full control of its own behavior. Go back some years, and suppose that some people foresee that a main receiver of the capital inflow to the trade-deficit country the U.S. will be the U.S. government, which will waste lots of it. I think those people would be justified in being skeptical of pure free trade. As the columnist Spengler (David Goldman) quipped, the United States is the only country in world history to borrow all the world's money and spend it on 4 years of binge drinking by its young people. :-) reader Shannon said... If you are married to a French at least 4 years and prove that you live together in France (as if they would check!). Otherwise you have to ask for naturalization and that's a pain in the neck (thank God). reader Smoking Frog said... Shannon, that's not what the copy I got from Disqus by email says. Did you do some additional research and then edit? :-) reader Shannon said... Sorry I'm lazy this morning but believe me: any foreigner can apply for this pension if they can prove they live in France. A petition was made last year by some pissed off taxpayers and I am almost certain nothing has changed so far. A lot of old people in France don't earn half of what a foreigner can get... It's scandalous, only the Front National revealed this fact... reader Smoking Frog said... Well, what I was getting at is that if it's hard enough to become authorized to live in France (e.g., if I couldn't do it), the loss to France won't be great. reader Smoking Frog said... A lot of old people in France don't earn half of what a foreigner can get... It's scandalous, only the Front National revealed this fact... That's easy to fix. Just de-authorize the old French people. :-) reader Shannon said... Well SmokingFrog more than 600,000 foreigners receive this pension... reader Shannon said... He might reduce their pensions... and the French pensioners' ones as well of course. But nothing is certain with this president who doesn't know what he wants to do. He is like the king of France all depends on his mood of the day... reader Smoking Frog said... I hope you know I was kidding. reader Shannon said... I know ;-)... (but I'm not ;-). Do you want a true joke from our president this morning? He's visiting Japan and he made a slip calling them...Chinese !!! reader Smoking Frog said... That's pretty funny. Ordinary Mexicans tend to call all East Asians chinos [Chinese], and ordinary Americans correct them. reader Eugene S said... David Ricardo's Theory of Comparative Advantage has been around for some 200 years. It's a better-tested theory than quantum mechanics and general relativity combined. Not even Paul Krugman can harm it. Free trade works. It enriches every society that allows it... in the aggregate. But some people do not profit. They lose. In the U.S. and in Europe, manufacturing jobs have been lost. These jobs are in China now. At the same time, open-borders policies have let masses of people into "first-world" countries. Some of these immigrants are displacing indigenous labor. Others are soaking up welfare benefits, some of which otherwise would have gone to indigenous welfare claimants. A lot of people are angry over this. But they are a minority. They can't convince the majority, which continues to be pleased with free trade and open borders, to change course. You would expect the minority who are losing ground to lash out and become violent. Perhaps this will happen, but it isn't now. Instead, some of the immigrants are lashing out, not content with the benefits already being lavished on them. reader Eugene S said... Dear Frog, I think Lubos' point was that in a planned economy, prices lose their function as a signal of economic scarcity. The central planners could have fixed any price for the coal they wanted. They had it rigged so that the power plant was the captive consumer of the coal mine, without a chance of sourcing their coal elsewhere (at a lower price). The power plant consumed all the coal from the mine, which is an indication of inefficiency. In the real world, the capacities of producer and consumer do not match exactly. Either a producer produces "too much" for one customer and must find additional customers for its output, or it produces "too little" and the consumer must find additional producers. A one-to-one correspondence is a fantasy in the mind of planners who think they are omniscient. In this case, it is likely that the coal mine was working below capacity and thereby wasting resources. Because the power plant was paying too much for the coal, it was operating at a loss. For it was not allowed to pass on the full extent of its cost to the private households consuming its electricity. So the central planners had to come up with all sorts of creative bookkeeping to obscure the reality. It was just one big shell game. A brilliant image for the stupidity and waste of central planning is in Joseph Heller's novel "Catch 22", in which a wounded airman, encased in plaster casts, lies in a hospital bed, with a catheter coming out a hole at the bottom and draining into a jar on the floor. When the jar is full, the liquid is poured into a drip, which feeds into a syringe on the man's arm. Input = output --> books balance perfectly. reader Eugene S said... Ask la Shanone what Edith Cresson (former French PM) had to say about the Japanese and les Britanniques ;) reader Shannon said... Eugene, my name is Shannon. Yes I think remember Cresson who said that the British were all gays right ? lol ! What did she say about the Japanese ? :-) reader Gene Day said... Free trade works, of course, and trade restrictions have led to vast human suffering, orders of magnitude more suffering than experienced due to the displaced indigenous labor (although that cannot be ignored). Immigrants are lashing out in a few European countries but not in my country, which has, by far, the largest number of them, mostly from Mexico and Latin America. I think it is important to understand this striking difference in behavior. There are several factors contributing to this difference but the most important one is recognizing of the need to integrate the newcomers into society, to blend their culture with ours and to allow them the opportunity to fulfill the hope that caused them to come here in the first place. Perhaps it is easier for us since we really are a nation of immigrants but it is never easy. You have to work at it. The immigrants must not be isolated in ghettos and supported at great expense while being separated from the society that they really do want to join. Of course they don’t want to abandon their own traditions; no one would do that, and the more they feel cut off from society the more they will cling to their traditions, sometimes disruptively. I know quite a few Muslim immigrants and can assure TRF readers that they are just as hard-working as are our Latinos. They don’t expect a handout either. reader Gene Day said... Jeff Hay’s (not Jeff Hays’) references are selected sources; they do represent his views and they are clearly biased. No amount of reading can give you an accurate picture of China unless you are a great deal more skeptical than you are. My sources are directly from within the PRC leadership, mostly from Xihan Li, who ran the entire machine tool industry in China and who served on the Beijing City Council. He speaks English better than I do and has been to 56 different countries as a representative of the PRC. He is the most astute and knowledgeable man I have ever met and absolutely unimpeachable. My older brother has long been a good friend of Xihan and, as a result, was one of the first foreigners invited into the inner sanctum of the Forbidden City. You can quote references ‘till the cows come home but you won’t learn much about China unless you learn to question everything. reader Eugene S said... Sorry, Shannon it is then. Yes, Cresson said something like that about English men. (To be fair to her, if one were to look only at the so-called "public schools", one could be forgiven for thinking in that direction.) She also said that the Japanese "work like ants" ("ils travaillent comme des fourmis") and that Europeans could not possibly match that as they needed time for culture... reader Gene Day said... That’s funny, Luke. I’m still trying to visualize China as a bull in a china (not China) shop. LOL. reader Shannon said... Lol! I miss her ! I guess they were only jovial silly remarks. In the case of Hollande it is only pure ignorance. reader Gene Day said... I completely agree with you, Lubos. It is unfortunate that the PRC leadership is terrified of social unrest and unable to tolerate any powerful, non-governmental organization or any political opposition whatsoever. There are good historical reasons for this and China is not about to morph into a Jeffersonian democracy. We absolutely must treat them with respect and as equals. We have nothing to fear from China and the fear mongers like Luke are just wrong, really, really wrong. Trade restrictions will only hurt everyone and could even lead to disaster. reader Eugene S said... This book has the Japanese prime minister with huge bug eyes and antennae growing out of his head. I would send you my copy but unfortunately it got lost. But you can buy it used ;) reader Luboš Motl said... Exactly, trade helps both sides - even though the sides are different. It's the thing that creates peace and advantage for both sides even though they could hate each other for many other reasons. I can't resist to link to Milton Friedman's The Pencil again: http://www.youtube.com/watch?v=R5Gppi-O3a8 We may like people who are like us - and for example, I think that Czechia is close in spirit to America etc. - but if the others who are different don't really hurt, one should get used to their existence and to their differences. The Chinese aren't universally happy in China, but we're not universally happy in our countries, too. The idea that 1 billion people is being completely oppressed against their will and the things they find most fundamental are completely incorrectly organized (for them: I mean things essential for them, not things that we think that should be essential for them) is implausible simply because such a regime wouldn't survive for such a long time. reader lukelea said... Don't you think Xi sort of looks like a bull? I bet the political cartoonist will be onto that before long. Among other things the Chinese are very clumsy at diplomacy. They are hobbled by an inferiority complex which they compensate for with a chip on their shoulder. You wouldn't believe the xenophobia either. I'd say China is feeling her oats much as Germany did in the 19th century. Hopefully they won't be led by a fool like Kaiser Wilhelm anytime soon. reader lukelea said... I'm a big fan of Friedman's myself. I backed him into a corner in a private epistolary debate over free trade with countries like China back in the early 1990's. It was to the point that he would have had to deny the law of diminishing returns though, out of respect and consideration for his age, I didn't press my advantage. I felt honored that he would even deign to correspond with me a thousand words at a whack through several rounds. He's probably my favorite economist and not just for that. He gave me encouragement when I was still a young man. See my Note on Wages and Prices if you can find it on the web. You'll have to dig deep. reader lukelea said... My sources are directly from within the PRC leadership. . . You are naive. reader lukelea said... How wrong you are. Even Paul Samuelson would disagree however reluctantly. Free trade is the political correctness of academic economists. Which is not to say that the theory of comparative advantage is false. Only that when that advantage is in the relative abundance of the factors of production, it requires the principle of compensation, which even Ricardo allowed. When one industry is hurt, that is one thing, but when an entire factor is hurt -- in this case labor in developed Western societies -- it is quite another. See World Trade and Payments by Caves and Jones for the classic teaching text on the subject. Or my paper on GATT Justice: Who Gets the Gains of Trade, which I linked to above. Research the Factor-Price Equalization Theorem or Samuelson's classic paper on Protection and Real Wages. I'm starting to feel like Lubos Motl only in the field of economics. ;) reader lukelea said... If you haven't noticed, Gene, we are drifting steadily towards a racially stratified class-society ruled by a new aristocratic elite. You have to be in thrall to the mindless celebration of the cult of diversity not to see this. I wish it weren't so but it is. reader Gene Day said... I may be naive but Xihan Li is the least naive person vis-a-vis China that I have ever known. He is amazing. I also note that you have run out of substantive comments, not that you ever had any. reader Gene Day said... You think China does not have competitive markets? That’s just nuts, Luke, although their local competition does not always look a whole lot like ours. Whether this ends well is an open question. China faces a seemingly insurmountable problem; they must release their restrictions on communications or fail to grow fast enough to maintain social stability. They have been lucky so far but it would be a big mistake for the west to make things more even more difficult for them. We would deeply regret any such course of action. We will probably see some sort of catharsis in China eventually and we can only hope that it is relatively non-violent. They have a long way to go to evolve into a pluralistic society and the way forward is unclear. Increased repression will only delay the upheaval and make it worse when it does happen. Above all, we must not try to isolate China. We in the U.S, and, especially, our European friends have our own problems but they have little to do with China. We have to clean up our own mess and not blame someone else. By the way, I have spent a great deal of time perusing factsanddetails.com but, so far, I have found nothing new there. It’s really just a reference site and not a very good one at that. reader Gene Day said... I have met a smarter or a better diplomat than Xihan Li and it is a fact that China is just loaded with skilled diplomats. You have convinced yourself of a screwball picture of that land, my friend. I’d be a bit careful of xenophobia accusations, too, if I were you, Luke. reader Smoking Frog said... Eugene: There's no need of the big lecture. I only meant that if you're producing a valued product, and people are using it, your activity is not "completely useless," and the salaries are not "pure loss." reader Eugene S said... Wow, am getting attacked on opposite sides by Gene Day and Luke Lea.... I must be doing something right! Gene is looking out through rose-tinted glasses while for Luke everything is doom and gloom. reader lukelea said... I'm sorry, that comment about immigration should have been directed to you Eugene, not Gene. On free trade let me be succinct. The theory holds that in principle everyone can be made better off with free trade because the gains of the winners always exceed the losses of the losers (in terms of total GDP). But what is true in principle is only true in practice if the losers (in this case American labor) are compensated out of the gains of the winners (people who derive most of their income from capital, including brains and education). That is not happening today because we don't know how -- or, rather, we don't have the institutions in place to make it happen in a fair and efficient way. It would require wage subsidies (a vast expansion of the earned income tax credit) financed by a graduated expenditure tax as originally proposed by Irving Fisher. A graduated expenditure tax is basically a progressive tax on consumption, like an income tax but with savings tax exempt -- thus making every account like a modern IRA except there would be no limits on annual contributions and no penalties on early withdrawals. This is an old idea whose implementation has only become possible with the advent of internet banking. Why? Because it requires registering all bank and brokerage accounts not just in this country, but around the world. It means shutting down overseas tax havens and outlawing shell corporations. In other words it requires the cooperation of our European allies and all our major trading partners. There are no national solution to our problems anymore. What is required is statesmanship of a high order in the field of international diplomacy. I'm sorry but I can't get anymore specific than that. All these ideas are found in the economic literature. They are not peculiar to me (see The Expenditure Tax by Kaldor for a good historical introduction). reader Eugene S said... O.K. that is a bit clearer, I see what you meant by "compensation" now. While free trade surely does not bring "orders of magnitude" more benefits than losses (that's Gene's rose-tinted worldview), it does benefit society overall: there are more winners than losers. You claim that "American labor" is losing out. That is true for many workers, mainly unskilled but also skilled. But it is not clear for all, not even for a majority of laborers. You have not provided any proof of your assertion. You keep referring to Steve Sailer's blog. Sailer is a nativist and moderate white nationalist who occasionally strays into racism (against blacks) and antisemitism. He publishes hilarious articles about the latest political-correctness insanities that I would not hesitate to recommend. However, I would not cite him as an authority on anything. Sailer keeps telling his readers what they never tire of hearing: there is a war on against white men, the stuff that gets printed in mainstream news media nowadays is often Orwellian doublespeak, blacks are on the rampage in the inner city, Mexicans are a drain on the economy, academia is ruled by Robespierrean commissars, "elites" are promoting free trade and open borders at the expense of us regular folks, Jews with their double loyalties exploit America to benefit Israel, the white man can't get an even break anymore. While there is truth in all these claims to some extent, it also leaves out much or even most of the truth. What Sailer and his acolytes "forget" is that immigration and abolition of trade barriers benefits not only fat-cat capitalists and shady money men on Wall Street. They, too, benefit as consumers from the deflationary pressure on prices that comes from allowing imported goods to be freely sold in the U.S. And they benefit from open borders, too. As people live to a longer age, the burden of care for elderly parents increasingly falls on their adult children. Few families can afford to have one spouse stay at home to care full-time for a senior. Good nursing home care is expensive, too. Enter Juanita, that nice brown-skinned woman from Chiapas Mexico. She is willing to work for less and we are overjoyed because we can barely afford to pay her. Likewise for cleaning ladies, short order cooks, hospital orderlies, home-improvement helpers, and on and on. We can talk all day long about "Buying American" but when push comes to shove, we do as our pocketbook dictates... and then go on the Internet to bitch about those damn foreigners. Even the nativist website VDARE, which publishes Sailer and others like him, agrees with me. On this page, they publish a chart that purports to show who benefits from immigration and who loses out. They claim that "net gains to natives" from immigration are$35 billion.

Your proposed "compensation" scheme to help the people who are getting shafted by globalization would never work. It is a bureaucratic nightmare. It would practically require a one-world government. The gigantic redistribution of money would invite corruption and it would pose the wrong kind of incentives. Not buying it.

However, I would not be surprised if the pendulum starts to swing back eventually in the direction of protectionism, with more pro-labor, pro-domestic producer policies getting applied. If more people than presently get pissed off enough to elect politicians to implement such policies, then this could happen. But it won't be soon.

Well, I don't want to get off on Sailer except to deny that he is a racist or anti-Semite or white nationalist. Otherwise I wouldn't read him. As for the gains of immigration, Harvard labor economist (and Hispanic) George Borjas recently published Visit W3Schools showing that on balance American are losing $400 billion a year in lost wages while capital is gaining$440 billion. The difference, \$40k, is the net gain to the economy. You should not that these calculations take into account the changes in consumer prices -- that's what it means when real wages fall.

I cannot speak to your situation, Luke, but that does not describe the society that I live in. Perhaps you should get out more and read less.

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