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February 2003, Volume 21, Number 2

Who's Afraid of the Red Dragon?

Jude Blanchette

In his essay "A Chinese Tale," Frédéric Bastiat puts a far eastern spin on his "Broken Window Fallacy." In it, Bastiat writes of two ancient Chinese cities, Chin and Chan, connected by a "magnificent canal." The Chinese emperor decides to have blocks thrown into the canal to interrupt trade and travel. Upon hearing this, his chief advisor, Kuang, disagreed with the decision, boldly declaring, "Son of Heaven, you are making a mistake." The advisor's lament was disregarded and the canal was soon blocked. After a time, the emperor summoned Kuang to view laborers busy excavating and laying pavement for the construction of a new highway. 

More time passed (three moons, to be exact), and Kuang was again summoned by the emperor. The highway was complete, but now inns were being built to facilitate the travelers on their way between the two cities. Kuang remarked, "It was the destruction of the canal that provided jobs for these poor people." 

Still more time passed, and again, Kuang was brought to the emperor and told to view the highway. This time, as Bastiat writes, "he saw that the inns were always full of travelers, and, grouped around them, were the shops of butchers, bakers, and dealers in swallows' nests, to feed the hungry travelers. And, inasmuch as these worthy artisans could not go about naked, there had also settled among them tailors, shoemakers, and dealers in the parasols and fans."

Amazed, Kuang declares, "I should never have thought that the destruction of the canal could create jobs for so many people."

After a time, the emperor dies. His replacement immediately orders the canal reopened. But with the loss of the labor created by the destruction of the canal, how will the people have money to buy goods, questions Kuang. Kuang's dissent falls on deaf ears and the canal is reopened. As he leaves the emperor's company Kuang worries, "I can see that before long we shall be in want of everything, since we shall no longer need to do anything."   

To read the works of Bastiat is to read economic clarity and logic at its finest. However, numerous examples of the same "broken window fallacies" Bastiat debunked some 150 years ago can be found today in abundant supply. While these neoprotectionist arguments are cloaked in modern language, their core sophisms remain unchanged.

In particular, China has come under increasing scrutiny and criticism for delivering to the world marketplace increasingly cheaper goods. Since its acceptance into the WTO a year ago, China has positioned itself as a leader in low-cost, high-quality goods, ranging from sneakers to electronic equipment. 

Indeed, after almost 30 years of anti-Western and anticapitalist rhetoric by the nation's communist leader, Mao Zedong, China has been liberating its economy at an impressive clip. It has freed vast sectors of its domestic and international markets. It has successfully joined the WTO and has been an active supporter of the formation of the Association of Southeast Asian Nations (ASEAN), a free trade organization composed of southeast Asian countries. It has even strengthened trade ties with perennial rivals, Taiwan and Japan. In short, China has integrated into the world economy to a degree unthinkable 20 years ago. 

Yet in doing right, many feel that China has done wrong. Its crime? Engaging in the voluntary selling of its goods on the world market for the most competitive price it can. With an abundant supply of increasingly productive labor, the Middle Kingdom has established itself as the manufacturing base of the world. In 2001 China received $47 billion in foreign direct investment (FDI), a 15 percent increase, while the rest of Asia saw FDI decrease 24 percent. As reported in the October 10 issue of the Far Eastern Economic Review, A.T. Kearney, a US-based consulting firm, published a survey that found China to be the world's favorite destination for investment by large multinationals. This inflow of capital and investment has given new life to China's manufacturing base, with the country now positioning itself behind the US, Japan, and Germany to be the world's fourth largest producer of industrial goods. 

Yet, it is here that the miraculous success story that is China ends and the "menace from the east" fable begins. Fears range from China's role in global deflation, its threat to world manufacturers, and its increasing current account surplus with the United States. As China increasingly fulfills its promise under WTO rules to move toward free trade, calls for protectionism in the US and elsewhere threaten to stall its economic agenda.

It must surely smack of hypocrisy for the United States, ostensibly the world's bastion of free-market capitalism, to lament China's sale of increasingly competitive goods and services. Quoted in the Wall Street Journal, Cho Tak Wong, chairman of Fuyao, remarked that, "Out of the Americans' mouth come speeches about free trade, but what they do is something else." 

 Citing unfair trade practices by the Chinese, US producers are calling for the Bush administration to intervene by leveling the playing field and smoothing out "market distortions." Other producers are asking for protection from China's imports, as the seemingly endless supply of labor in China allows for its prices to be significantly lower than domestic producers can hope to match. In essence, the same protectionist arguments are being recycled, but with a new enemy: China. 

So we return to the fabled canal in Bastiat's "A Chinese Tale," a canal through which the citizens of Chin and Chan could gain wealth through trade. By throwing obstacles (tariffs, quotas, etc.) into the canal, the emperor hoped to enrich his people. So too the Bush administration, in an attempt to "protect" domestic producers, to grow these industries and to create jobs, has implemented tariffs on steel, subsidies for farmers, and is considering further protections for high tech producers. To use the parlance of Bastiat, the US government is only looking at "what is seen."

To be sure, China's dominance on the global marketplace has affected the domestic industry of the US and of myriad countries around the globe. Jobs have been lost due to foreign competition, whole companies have even gone out of business. This is the visible; the effects that can be reported on the nightly news, that find coverage on the pages of the New York Times and BusinessWeek and that move the public to call for greater protection of domestic industry. Viewed only through the lens of the explicit, of what can be seen, protectionism might indeed be justified by economic utilitarianism. 

As Bastiat wrote, however, "There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen." 

What does it mean when, in the words of the Far Eastern Economic Review, "Chinese goods are hammering the world," or when the cover of BusinessWeek asks, "Is [China] a threat to Silicon Valley?" Again, Bastiat provides a lucid rebuttal:

"You may look at the question from any point of view you like, but if you examine it dispassionately, you will see that no good can come from legal or illegal plunder. We do not deny that it may bring for Mr. Protectionist or his industry, or if you wish, for domestic industry, a profit of five francs. But we affirm that it will also give rise to two losses: one for James Goodfellow, who pays fifteen francs for what he used to get for ten; the other for domestic industry, which no longer receives the difference. Make your own choice of which of these two losses compensates for the profit that we admit. The one you do not choose constitutes no less a dead loss."

One could continue at length quoting the works of Bastiat that support free trade and demolish protectionist fallacies. Yet it is simply enough to understand his fundamental insight that results of trade restrictions are concentrated and explicit, while the benefits of free trade are dispersed and subtle. The support of free trade depends on clear, effective elucidation of the benefits arising from economic freedom. 

The rise of economic China is a boon for consumers and producers around the globe. To focus on the harm done to specific groups of labor in specific industries is to overlook the benefits that lower priced goods bring to the actors and entrepreneurs within the economy as a whole. Viewing the economy in static snapshots is to ignore the evolving canvas that is capitalist "creative destruction." Being able to purchase more goods for less money gives consumers the ability to partake in activities otherwise too expensive while companies that can obtain factors of production from abroad for less can expand production. Resources are allowed to flow to their highest valued use, insuring that capital is allowed to be utilized where it is most productive. 

While Bastiat's literary scalpel dissected these protectionist "sophisms" over 150 years ago, they still plague us today, albeit dressed up in contemporary economic jargon. In 1824, British historian Thomas Babington Macaulay described capitalism's quandary best when he wrote, "free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular." .FM    

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Jude Blanchette studies economics at Loyola College (jblanchette1@hotmail.com)

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