Trade Deals Will Lead to Economic Downfall

Emile Woolf

October 18, 2023

Ursula Von der Leyen, Chief of the European Commission, complains bitterly that the Chinese are keeping the price of their electric cars artificially low by “giving their manufacturers huge state subsidies, and this is distorting our market”. Does she have an original proposal for addressing such wicked behaviour? Sadly, no. Just more protectionist tit-for-tat in the shape of higher tariffs on imports from China. She declares that European carmakers are up in arms, being unable to compete with cheap imports. 

Whenever the state, any state, interferes with the working of markets, we should stand back and ask ourselves: “Who will be the winners, and who will be the losers?”. European citizens wishing to buy an electric car would no doubt be delighted to receive a gift from the Chinese government in the form of a generous discount, but Ms Von der Leyen’s tariff will assuredly wipe this out – an action which will cause her fellow Europeans to lose out. The Chinese government subsidies are borne by Chinese taxpayers who are also losers in this race to the bottom. 

The EU winners are carmakers, protected against competition by a tax on imports. In China the winners are the recipients of taxpayer-funded subsidies – again, carmakers cushioned from the brutality of having to compete with rivals on a level playing field. It is altogether a wasteful and pointless zero-sum game. 

The same game is being played in the UK. A wise prime minister would scrap the very notion of “doing trade deals” instead of traipsing off to India to contrive one, and would know that only businesses – not governments – trade. A wise prime minister would know that only a declaration of unilateral free trade – with no need for string-pulling or reciprocation – will produce the win-win that our economy craves. 

While trade deals are one facet of questionable economic policy, another is the misconception surrounding inflation. Treasury officials, government economists, monetarists, and politicians still equate inflation with price increases. But price increases are the result of inflating the money supply. To establish the rate of inflation, what matters is not the growth rate of prices, but increases in the money supply – it is this which sets in motion the phenomenon of exchanging “nothing for something, undermining the process of wealth generation and weakening the pool of real savings”, to quote Frank Shostack. 

This occurs whenever the central bank buys treasury bonds and pays for them with money generated out of thin air,  debasing the currency and pushing up prices. While ‘experts’ in the treasury, Bank of England, and the Office of Budget Responsibility appear flummoxed by questions about causes, the public is more focused on their escalating cost of living. They expect that government help is at hand – it always is.

I encountered this syndrome when visiting New York shortly after the 2010 financial crisis. I stated that Bernanke, Greenberg, and Geithner should have resisted the begging for bailouts. My listeners were incredulous, telling me that not to have acted would have brought the banking system down and caused widespread joblessness. “Bring it on!” was my heartless reply. In the human body, there are times when a licentious boil needs to be lanced. Likewise, when money-printing has thrown the economy into a dysfunctional state of capital misallocation and malinvestment, the temptation to apply bogus remedies must be resisted. 

Failure to link symptoms with causes is acute when, as now, by-elections loom and vote-catching tops every political agenda. The intensity of inter-party rivalry can be gauged by the size of their respective give-away promises. No one asks where all their debt-laden beneficence will come from, or if it will ever be repaid. What’s demanded is relief. When I point out that a nanny-state dependency culture has robbed our citizens of self-reliance – and that unless it is brought to a halt the inescapable outcome will be financial and moral ruin, I am accused of being uncaring.

Few are awake enough to see the only remedy is production growth: providing goods and services people want. But wherever you look the reverse is happening. Once-successful businesses are closing down. 

Today’s problem is the impossibility of bringing innovative ideas to fruition in successful businesses. Regulatory overkill and penal taxes have stifled enterprise. The system finds new ways of countering production, of reciting all the things we can’t do. Battalions of town hall bureaucrats are paid to invent new ways of enforcing regulatory asphyxiation. 

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