I have been writing on protectionism recently, and sometimes I think I am not being clear enough. So I am going to write this post, which may seem like something of a hodge podge of ideas, but it is meant to clarify points I did not address in past posts. As it makes no sense on its own, I will include links to all my protectionism articles at the end.

First, I feel I need to clarify something I have argued many times, but sometimes still feel does not come across. It is the tendency of the protectionists to myopically focus on jobs alone, or even sometimes put the cart before the horse.

Let me start by asking, do you work so you have money, or do you spend money so you have an excuse to work? It is not as silly as it sounds. Think of the basic protectionist argument, we want to sell goods to foreign countries but buy as little as possible from them to maximize jobs. That is essentially taking the second position, we spend money to give us reason to work. Think about the logical consequence of the protectionist position. Their ideal would be everyone in the US working full time, with every bit of US product going to a foreign nation, while we did not spend a dime on any of their goods. True, we would have full employment, and we would aly up a massive store of foreign exchange. Only problem, we would starve to death, or die of exposure.

Now, let us consider the opposite. Every foreign nation on earth sends us their products at very cheap prices, yet never spend a dollar that we send them. Wouldn't that amount to the other nations of earth supporting us for free? In fact, except for printing dollars, couldn't we all then retire and live on the largesse of all the exporting nations thanks tot heir protectionist policies? And we could print as many dollars as we want, as they would never spend them, as it would violate their protectionist principles.

Now, which makes more sense? The second? Why? Because we are consumers. Yes, we work, but only because it brings us what we need. Yes, we need jobs, because without them we would not produce the goods we want or goods to trade for what we want, but work is a means, consumption an end. The protectionist obsession with jobs, even at the expense of more costly or absent consumer goods confuses means and ends, elevating work to prominence above our own comfort and satisfaction. That is a backwards view of the economy.

Second, allow me to talk about balance of trade and trade deficits.

I wrote before that some trade deficits are book keeping illusions. For example, American consumers buy trucks from Toyota, then Toyota uses that money to build a plant in the US. The trucks are "foreign trade", the plant is not. So an illusory "trade deficit" exists. But in truth, we traded the rent on that land, the construction costs of that factory, the property taxes, the wages, and so on for those trucks. There was no "trade deficit" simply a decision not to count some exchanges as "trade". The same holds true for calculations which do not count some services, or investment. Yes, it is true we did not exchange consumer goods of equal value, but some good or service, or equity was traded. There is no trade deficit.

However, there is another type of "trade deficit" which can exist, but is every bit as illusory as the one above. That is a single nation trade deficit. Say we buy steel from China. It is true we may not sell an equal amount of goods to China, but that does not mean there is a trade deficit. Those US dollars need to be spent here (unless held, but more on that later). However, they may not be spent by China. Say a French manufacturer wants something from the US. He may trade goods to China for those dollars, then use them to import goods to France. On paper we have a "deficit" with China and a "surplus" with France. However, we have traded goods of equal value, so why is this a problem? However, again and again, you will hear the press decry our trade balance with a nation (China or India today, Japan in the 80's), as if the nation could somehow sell us goods and then just make the dollars vanish.

Of course, there is a way there can be a non-illusory deficit. A foreign business can choose to hold dollars. However, this is simply a personal decision. Much as US investors often choose to hold foreign currency, so do foreigners hold US currency. Exactly how this harms the US, I can't see. Nor does it violate my general rule. We are still exchange goods for goods, in this case it just happens the "goods" are the units of currency themselves. (Considering how badly we inflate the dollar, I have to ask how it could be harmful to the US for a foreigner to hold our currency. Isn't it far more harmful to the US for Americans to hold that rapidly depreciating paper?)

The other fear most often voiced is that a foreign nation will "buy up the US". You heard it about Japan in the 80's, in the context of buying US industries, and hear it today in the form of paranoia about Chinese holding of US treasury bonds. And those two do manifest the two versions of this worry quite well. First, that foreigners may buy our industries, and second that they may buy government debt.

The first puzzles me even more than the second. If the protectionists are obsessed with jobs, shouldn't they welcome foreign investors creating more jobs here? After all, then we no longer need to import their goods, we can make them right here. On a more serious note, don't most countries TRY to attract foreign investment? And isn't it true that throughout history, the nations which attract the most investment, domestic and foreign, tend to be the most wealthy? So why would we be upset if we give trinkets to another nation and they then use the proceeds to develop our industrial infrastructure? The only argument I can see is that strange "always prepare for war" mindset which worries that foreigners are going to suddenly go to war for no reason. However, since this investment is on US soil, I don't see how ownership by a hostile power would hurt us, as we would likely confiscate the factories in war time, allowing this investment to do little or no harm.

The second is also absurd, but less obviously so. The basic idea is that China, let's say, can buy up all the US debt, and like a mob boss holding a poker player's tab, can then force us to obey. I wrote about the absurdity of this before, but let me give a quick refutation. First, one of the main reasons the government doesn't simply repudiate its debt is that it will hurt US citizens and thus lose elections. If China held all our debt, that would not be a consideration. So, should China try such a scheme, the government would have to simply repudiate the debt, and China would be left with massive losses and nothing else. Yes, we probably could no longer borrow from China, but we could still probably find borrowers, or the government would just resort to inflation. It would not be a catastrophic event.

Of course, the other reason to dismiss this theory is even more conclusive. Treasury Bills are not demand notices, they are bonds. Even if China held all our debt, they could not "call" it. They could refuse to lend any more if we wanted to refinance, but there is other money on earth. So, even if they held all our debt, they would have no more power than if you bought all the bonds issues by US Steel. They would have a claim for timely payment, and that's it. Which makes this a very silly theory.

There are probably other topics I am forgetting, but for now these two points should do. If anything else comes to mind, I will add a postscript or create a new post. Hopefully this has cleared up a little of my previous discussion. If not, I am sure someone will point out my omissions.

ADDENDUM

I knew I forgot something, fortunately it came up in comments to another post. That is the idea that cheap currency somehow benefits the inflating nation by favoring exports. Of course, I could just dismiss this by pointing to my argument above, that favoring exports over imports is silly anyway, but since this actually reinforces that point, allow me to discuss this a little.

The problem with inflation is that money prices tend to increase even faster than money supply increases, and the same is true of foreign exchange. In other words, prices not only reflect the value of the currency, but also the anticipation of future inflation.Which means that exporting nations with "cheap" currency, do tend to export huge quantities, but they do so by selling at a value less than market, once we adjust for exchange rates. Likewise,t hey tend to overpay for imports.

If you want an example, you need only look at the figures for Germany in the early 20's. During the peak of their hyperinflation, Germany had a hugely "favorable" balance of trade, at least by the pro-export standards. They were exporting a lot and importing a little, at least in terms of goods. But that was only because they were giving away goods well below their real value, and paying more than market value for what they imported.

In other words, they were exporting a lot by giving away part of their exports for free.

And that is true of any nation with "cheap" money. So exactly how that is beneficial to an economy (other than allowing them to do mor work to maintain the same standard of living, which seems ot be an protectionist goal) is beyond me.

(For a slightly more in depth discussion of both exports and hyperinflation in general, I once again find myself recommending Hazlitt's The Inflation Crisis and How to Solve It. Though in this case, Benjamin Andersn's Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946 is also a good reference for Germany and the US during the same period.)

ADDENDUM II

I was reading a pundit here, and saw this in a comment, illustrating one fo my points in an interesting way:

but no, we hallucinate about a "service economy"
if you believe the lie about "service economy", tell me, just how many container shiploads of service has china bought from the usa? not even one? how many containers? pallets? cases? packages? so we sing the service economy song while we die as a nation.

Think about this for a minute. According to this, a street peddler is definitely richer than a doctor, lawyer, investment banker, actor or pro athlete. After all, how many pallets of goods did you buy from your doctor? You definitely bought twelve pencils from the blind man, but the doctor gave you no goods at all, so the blind man must be richer by far!

This sort of focus on the products of heavy industry and ignoring that there is any other kind of exchange is reminiscent of the 19th century when countries worried about lack of farm goods thanks to industrialization. Yet agriculture poor, industry rich nations such as Japan did not do too badly, while agrarian nations, such as, say Nigeria, are not breaking into the G7.

Here, for those who decry a "service economy", explain to me why Switzerland and Singapore are not plagued by starvation. Or why Hong King was consistently wealthy before the Chinese takeover. All three have some industry but are hardly manufacturing power houses, yet all are very wealthy. How is that?

Because despite the beliefs of those who think in terms only of heavy industry, services do produce value and are in demand. If you doubt me, give up paying anyone for anything intangible. No doctors, lawyers, maids, policemen, computer programmers, bankers, no one who  does not hand you some tangible good. See how happy your life is without any of the "worthless" services.

POSTSCRIPT

Here is the promised list of protectionist essays:

Two Perspectives
How To Blame the Free Market
The Limits of Technocracy
Exploiting Workers?
Spend for the Fatherland, Citizen!
Protectionism
War Stimulates the Economy? Let's Nuke San Francisco!
Four Elections
The Theory That Wouldn't Die
Beware Populist Deception
Saving Us From Lower Prices
Term in Search of a Definition
Fear of Trade
To Correct Debra Saunders
The High Cost Of Protection
The Limits of Econometrics
The World's Oldest Myth
I Am A Conservative But...
Authoritarian Oil Talk
STOP BIG PORCELAIN NOW!
I Have Seen The Light
Free Trade, Employment, Outsourcing, and Protectionism
Those Darn Speculators
Fear of the "Big"
The Party Of Stagnation, Lies or Marx?
Coincidence is not Causation
Technology and "Natural Monopolies"
Misplaced Blame and A Power Play
Monetary Issues Made Simple Part I
Monetary Issues Made Simple Part II
Remember I Predicted It
Inescapable Logic
Prelude to a Full Argument
Microloans and the Community Reinvestment Act
History Repeating Itself
Smaller Government , Fair Weather Friends and Special Cases
An Analogy
Economic Illiteracy
Jobs, Jobs, Jobs, and More Jobs
Cheap Lighters, Overseas Dumping and Monopolies
Capital Investment
Outsourcing Example
More Proponents of Protectionism
Has No One Heard Of Lord Say?
Retaliatory Tariffs

I believe that list is comprehensive, but I may have missed one or two. However, the links in those essays should cover everything.