Being good economists, we all know about the benefits of free trade, division of labor, expanding markets, and all that good stuff. Free trade benefits both parties, giving them both something more valuable in exchange for something less valuable.
Or so it goes in theory. I am typing on a laptop computer made in China. As you are reading this, the Chinese are busy manufacturing all kinds of merchandise destined for American departments stores, all in exchange for worthless pieces of paper called U.S. dollars.
Why?
Why does any nation, with an abundant labor supply and sufficient military force to prevent foreign bullying, reduce itself to such servitude as to export real goods for fake money? Why does the Chinese government tolerate this? Why do the Chinese people tolerate this? What is in it for them?
Of course, in theory, somebody could use those U.S. dollars to buy things in the United States, but why would they do that? I’m sure anything the U.S. is capable of selling is severely overpriced by Chinese standards, minimum wage and all.
How does the trade between the U.S. and China profit China? I don’t understand it at all.
Well, the current situation does not benefit the Chinese citizens in anyway whatever, which is what you should expect from a communist totalitarian regime. But, on the other hand, it does benefit the CCP and the entrepreneurs they allow to produce. The Chinese devalue their currency and make their goods cheaper on the foreign market, allowing U.S citizens the privilege of buying high-quality cheap Chinese products. While the Chinese suppliers get relatively higher returns (relative to selling their products to their own poor citizens at diminished exchange ratios), and increased profit margins. The Chinese suppliers don’t care about the dollars as much as what they can get from the dollars (bonds, assets, investment, ect). This also allows the Chinese to hold large dollar reserves, which keeps their RMB pegged to the dollar, keeping it devalued. This is why the American consumer prospers, while the Chinese worker is trapped in poverty; thankfully, it’s not sustainable, which is why we’re currently in a massive international depression.
The dollar is over-valued, and the RMB is under-valued. They are creating artificial and unsustainable comparative advantages. This situation does not, in anyway, put in doubt the merits of Smith or Ricardo’s work on free trade. The Chinese economy is not the power-house we think it is; it’s most likely plagued with massive malinvestments, all of which are supported by pure inflation and manipulated interest rates/exchange ratios.