A Case for HR 1498

The United States trade deficit hit a record $69.9 billion in August, up from $68 billion in July. The deficit with China rose to $21.9 billion and China’s continual trade surpluses in 2006 indicate that the United States drives the road of ballooning trade deficits. US workers watch helplessly as their jobs drift overseas and domestic consumers increasingly purchase foreign goods as a result of the deficits. “Made in the USA” is no longer what it used to be.

To make matters worse, the Chinese government intentionally depreciates the value of its currency, the Yuan, by holding vast amounts of both US and other foreign securities. By purchasing and holding US treasury bonds, China has effectively pegged its currency to the dollar and consequently, keeps prices artificially low inside of its borders with an excess supply of Yuan in the market. China acquires $20 billion worth of foreign security holdings monthly and soon will surpass one trillion dollars of outside currency held. The amount China spends annually on depressing its currency is equivalent to one quarter of its exports worldwide, effectively a twenty-five percent export subsidy according Peter Morici, former chief economist at the US International Trade Commission. House bill HR 1498 reverses this trend, allowing the United States to curb the unfair Chinese measures that have let the deficit swell to its current size by justly taxing Chinese products.

China’s protectionist actions hurt US manufacturers already contending with low wage earning workers in China. In the globalized world, the effects of Chinese trade policy are not restricted to the manufacturing industry. Companies use undervalued labor to export services such as healthcare. X-rays and MRI scans of American patients are analyzed overnight by licensed doctors overseas and ready for American physicians in the morning to act on. Thus, as medical jobs are also outsourced, the impact of Chinese governmental policy resonates all over America, not solely in our factories.

These arguments are not new, nor are they unique to the United States; however, a notable solution for the United States lies within trade law. China’s twenty five percent export subsidy is tantamount to a tariff protectionist measure that lies outside of World Trade Organization (WTO) parameters for acceptable protectionism. HR 1498, the Chinese Currency Act, declares Chinese currency manipulation as unfair and encourages the US to take legal action against China under US trade law by imposing countervailing duties. This would allow the United States to tax incoming products from China to offset the effects of the subsidy. The bill helps the US by making it more expensive and ineffective for the Chinese government to pursue their currency devaluing practices.

This is not protectionism to shield infant industry from competition, nor is it protectionism to help gain first-mover advantage like the United States did with Boeing, or Europe with Airbus. Chinese trade practice is unjust and the United States is justified retaliating through the WTO. This administration has been unsuccessful in forcing China to abide by international trade standards, despite China’s membership in the WTO. HR 1498 gives the United States legal recourse to tax Chinese products, helping domestic producers and bringing much needed revenue to the government.

While counter tariffs may appear a short term solution, the effects of HR 1498 are long term. Other countries are currently inclined to follow China’s example and manipulate their currencies to maintain competitiveness in world markets. By taking a firm stand against unethical action by other governments, the United States signals to China and others that the United States and WTO members will not tolerate exploitative trade practices. Moreover, HR 1498 helps keeps jobs here at home in the United States for both manufacturing and the service industries by leveling the playing field. It helps preserve the legitimacy of WTO agreements by preventing individual countries from circumventing them. The bill helps the United States stand strong at a time when US political capital is scarce in the international community. The US needs to turn down the road of significantly reducing trade deficits, not allowing them to exponentially grow. HR 1498 is a step in that direction.

Thoughts/comments?
-Abhi

Bad Math in Economics

I sometimes feel that economists go wrong when they try to over-apply mathematical theory to their problems. At times, they seem to force the issue.

Don't get me wrong. Math is a language beautifully suited to model many things. We all know that math is useful in physics - to the point that people seem to mistake mathematical models of physics as necessary truths as opposed to viewing them as models. It is useful in computer science. It is useful in chemistry - well sort of. At least it is useful in quantum chemistry where representation theory is used. And math is useful in bio as well. Well, ok, maybe not in bio. But you get the point.

And I certainly don't feel that mathematics is limited as a language to model the "hard" sciences. I think math has utility in describing flows of discourse in Foucault's Archaeology of Knowledge. And the logical positivists and metamathematicians were no slouches either.

The problem I have with the way math is employed in economics is that, sometimes there is a tendency to feel that simply because things are stated in mathematical terms, they are more rigorous - hence more right. And in that impulse, researchers (at times) seem to forget that - well - what matters is not the theorem itself but how well the real world issue maps onto the conditions for that theorem to hold. For example, it is not uncommon to read horrible economics papers, exploiting some local phenomenon and accidentally applying the result as some global pheonomenon to comment on larger-scale results.

Making matters worse, it is not uncommon to read papers and analyses that seem to force issues and positions out of topological convenience. The problem is that results are contingent on fairly arbitrary and convenient assumptions at times. Lots of natural settings aren't Hausdorff spaces (ignore this if you have no idea what that means). The common response is, "well, look we aren't trying to say exactly what goes on. we are trying to get a partial analysis - get closer to the truth or get a better idea of how this one factor might contribute, ceteris paribus." Look, that is cute and all - but here is where that fails. Some of these assumptions that are made literally make the conclusion entirely different. It isn't necessarily a continous function - a slight change in the assumptions of your model does not mean that your conclusion is perturbed only by a bit. In fact, there is no reason a priori for us to think that conclusions are so perturbation-robust in the first place in many of these situations. These are assumptions that should be rigorously justified - but usually they are not because ... well ... to put it mildly, the assumptions are made because it is too hard to deal with the detailed problem in the first place.

At the end of the day - it is important to take a lot of the theory with a grain of salt. And it is important to see if they are robust to assumption-perturbation. Only if this is the case, can we utilize the models to conclude stuff about these "partial analyses" in the first place.