Is China Exporting Deflation?

by Llewellyn H. Rockwell, Jr.

Question: How many economic fallacies can be packed into four words? I don’t know the precise answer but I know the four words: China is exporting deflation. This phrase sums up the newest rap against the world’s fastest-growing economy, and also constitutes the newest rationale for protectionism. Yet there are so many errors in that phrase, it is hard to know where to begin.

Let’s start with the word deflation. There was a time when the meaning was clear. It meant the withdrawal of money from the economy by monetary authorities. Where is that happening today? Nowhere. It is not the nature of central banks to withdraw money. They have a penchant for doing the opposite, inflating, which is to say pumping money into an economy. It’s been the full-time occupation of central banks since their inception.

Today, the term deflation is far more likely to be employed to mean not shrinking money but falling prices, which people equate to introducing recessionary pressures. In other words, it is universally considered as something to be studiously avoided. This by itself is rather strange, if you think about it. Looking at the long-term trends, we can see that rising prices, not falling ones, have been the dominant feature of price trends for many decades.

Is deflation looming in the United States? There is no shortage of warnings. But there is a serious shortage of evidence. The current pressures are precisely the opposite. The CPI is rising, gold is rising, oil prices are rising, and the Fed is using its power over interest rates to expand the supply of money and credit. We should fear rising prices, and the distortions that come with interest-rate tinkering, not falling prices.

If China is trying to export deflation to the US, it is doing a poor job of it. Yes, in some sectors, prices are falling. In technology, for example, computers and other electronics are ever cheaper. That has been a boon for consumers. And it has not hurt producers either. The electronics industry is highly competitive, true, but also highly efficient and very productive. Bankruptcies have been rising but that is due to a bursting financial bubble, not falling prices.

Let’s say all prices, and not just those in one sector, begin to fall. Is that something to be avoided? Not at all. Rather, it is an indication that productivity is on the rise (it is a truism that productivity increases purchasing power, all else equal). In the US, prices fell for long periods throughout the 19th century, a time when economic growth surpassed anything we’ve seen since. Falling prices can be welcome news, after all. Perhaps if China were exporting deflation, the consuming public should cheer!

Alas, China is not exporting deflation. China is exporting goods — in a magnificent export business that is growing at 16 percent per year. Not only that, but with its labor markets increasingly free of central control, China is attracting foreign investments, including many producers who are seeking reduced labor costs.

Both trends are good for all involved, whether Japan, China, or the US. If China can specialize in making the same goods that would have to be otherwise made in the US or Japan, and can do so more cheaply, everyone wins: consumers get great products and the US and Japan are permitted to employ capital in other, more efficient lines of production.

Those who argue that China is doing an awful thing by sending cheap products in exchange for dollars do not have the interests of either country in mind. Their argument isn’t with deflation as such; it is with free trade, the greatest source of international cooperation and global prosperity in the world today. In order to shut down this international commerce, and create a domestic cartel of inefficient production, interest groups like US labor unions are inventing a deflation bogeyman to give the impression that US-China trade will lead to a depression.

Once again, this is sheer nonsense. Recessions are not caused by global trade. Recessions are an inevitable response to an inflated economy such as that seen in Japan in the 1980s and the US in the 1990s. Rather than harm economies in recession, global trade is the best prescription for restoring prosperity, because it provides new markets for products, affordable goods for consumers, less-expensive sources of labor and capital, and forestalls conflict that can lead to war.

The accusations against China are particularly intense from Japan, which is always looking for a scapegoat to blame for its continued economic woes. In the same way that the Bush administration absurdly raised tariffs on steel and lumber during a recession, Japan is pushing for a variety of measures that would reduce the competitive pressure it feels from China. A far better path for everyone would be to return to economic sanity the old-fashioned way: by cutting costs and producing efficiently.

The new head of China’s central bank was recently quoted as saying that he similarly fears deflationary pressure within China. Someone should tell this fellow that such pressures come with an economy that grows an astonishing 8 percent per year.

Any attempt to forestall falling prices will end up distorting the production structure, and lead to a round of boom and bust in China along the lines of what we’ve seen in the US and Japan. Rather than worry about deflation, he ought to keep the focus on what matters: maintaining the soundness of the currency and otherwise letting the price level fend for itself.

Laissez-faire, laissez passer! Leave it alone and let goods pass through! It is as good a rule now as when the phrase was first introduced in early18th century France.

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