Christopher Columbus Loves Genghis Kahn

   Christopher Columbus did not know know the Mongolian Empire was no more.  All he knew was that Eurasia had lost the safe and prosperous trade routes the Mongols had once provided, and he wanted to resurrect this lost source of trade.  So when we set his sails westward, he wasn't looking for India (contrary to what you learned in school), he was looking for the Mongol Court.
   Indeed, no emperor valued free trade more highly than Genghis Kahn.  His descendants and military ensured merchants safe travel.  Shelters were erected with provisions every thirty miles, and in some areas, guide to lead merchants entering new territory.  Passports and credit cards were created, as well as paper money.
   Perhaps most importantly, he abolished taxes and tolls that increased transportation costs without increasing the value of the goods traded.
   (This is something America's founders understood well, when in an amalgamation of fiercely independent states, they prohibited states from charging fees to merchants transporting goods across state lines.  Facts like these are causing me to rethink the idea that decentralized power is always a more desirable power.)
   It should be noted that this free-trade ideology was not just an ideology based on gains from trade, but the manner in which Mongol tribes instituted shares, where each ruler of one area of the empire shared some of his tribute with all other Mongolian warriors, requiring a safe and convenient transportation system.  The shares helped reinforce Mongolian cohesiveness. 
   However, it is not like the U.S. has a free trade policy due to ideology alone.  Lobbying by exporters plays a vital role in ensuring free trade.
   Whatever you think about Genghis Kahn, when it comes to trade, he is an economist's ideal ruler.

Source
Jack Weatherford.
Genghis Kahn and the Making of the Modern World.
2004.
Three Rivers Press.

Analogy for tariffs

The Qin dynasty was the first empire to unite all of China, though it only lasted fourteen years.  But in those fourteen years the Qin administrative system sought to standardize everything; including how areas were ruled, how weights were measured, coinage, and the size of cart axles—this last item I believe provides an excellent analogy to international tariffs.

The length of cart axles differed across states, and this is important because a cart may not be able to be pulled on a road whose ruts were carved by an axle of smaller or larger length.  This meant that if goods were exported from one state to another, as you approached the border of the new state you had to unload your goods from one cart and load them onto a different cart whose axle-length corresponded to the country you just entered.  As you can imagine, this increased the cost of exporting and importing goods considerably, and did so without changing the quality of the good being traded.

A tariff does the same thing.  It makes it more expensive to trade the good while not enhancing the good's quality.  Now, all of us can imagine the wealth resulting from standardizing axle lengths, as goods can now be traded with more ease.  However, the non-economist has trouble understanding the wealth generated from eliminating a tariff—but they are the same thing, conceptually!

And that is what makes the axle-length issue in ancient China such a great analogy for metaphors.

Source
Kenneth J. Hammond
From Yao to Mao: 5000 Years of Chinese History
Lecture Six: The Hundred Schools
The Teaching Company

Different Perspective On China's Currency Manipulation

Some Americans share the belief that because lots of Chinese yuan's exist out there, they have a competitive advantage in the export market, and are making a killing selling their products to America.  However, it is not the number of yuan's that matter, but the change in yuan's over a given time period, and whether those changes were expected.

To illustrate, would our trade flows be any different if, instead of the yuan, China used a different currency called the screw-US, and if there were two times as many screw-US's in this new world than there are yuan's in the real world?  Surely, an American dollar would purchase more screw-US's than it can yuans, but does that mean Chinese products will be cheaper?  Of course, not, because the price of Chinese goods in screw-US's would be twice the current price of those goods in yuan's.

It is not the amount of yuan's that matter, but the unexpected changes in the yuan.  If the Chinese government prints more yuan's without telling their citizens or the world, the exchange rate would indeed change such that more U.S. dollars bought more yuans, and Chinese products would become cheaper--temporarily.  However, unless everything I know about the world is wrong, that increase in yuan's will eventually translate into higher Chinese prices, and Chinese goods will no longer be so cheap.

Moreover, if everyone knows how many additional yuan's will be printed in the next month, that expected rise will be manifested in higher Chinese prices, a lower exchange rate (more yuan's for every dollar), and there will be no change in trade flows.

I say all that to say this:  if it is only the unexpected change in yuans that matter, and if we forced China to reduce its yuan's by a certain amount--an amount known with certainty--how would that benefit us?

It would not, and that is why trade policy is better understood from a public choice perspective.

Back to Destructive Economics

After the Stock Market Crash of 1929, government made sure this downturn would become a depression.  In May-June of 1929 Congress attempted to increase farm incomes by enacting tariffs on agricultural commodities.  There was a surplus of crops everywhere, including Europe which had recently recovered its agricultural potential from World War I.  Much of these crops entered the U.S. as imports, helping to hold U.S. crop prices low.  So by applying tariffs to these imports and making them expensive, buyers would turn to U.S. crops, bidding up the price of farm commodities, and increasing farm incomes.

However, other industries were not about to let agriculture benefit alone.  Scores of industry representatives testified in Congressional hearings that they too needed protection from foreign competition. When these hearings finally ended, there were 20,000 pages of testimony.  Hoover signed the Smoot-Hawley tariff on June 17, 1930, raising the price of imports by an average of 59% for over 25,000 different goods.  Predictably, other governments enacted their own trade barriers in retaliation.  As the world retreated into protectionism and isolation, wealth rotted. Next to the bank runs, the Smoot-Hawley tariff was the largest factor leading to the Great Depression and all the misery it caused.

Today we have our own financial problems.  How are we responding?  The Wall Street Journal recently reports, "The U.S. steel industry has now joined autos and ethanol in the conga line to Capitol Hill. Sort of. Steelmakers aren't seeking government bailout money -- a la Detroit and Wall Street -- but they are pressuring President-elect Obama and the new Congress to stack any stimulus proposal in favor of domestic producers, even though that would inevitably come at the expense of the nation's overall economic health." 

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