Frederic Bastiat lampooned protectionism back in 1845 when he penned his ‘Petition of the Candle Makers‘. The candle makers are incensed that the light of the sun can be had for free. The sun’s ‘unfair trade advantage’ surely needs to be curtailed somehow!
We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us.”
Replace ‘perfidious Albion’ with China, and you have Krugman. Krugman makes the same mistake he always makes – the one mark of a truly bad economist if you will – he neglects the ‘unseen’ effects of his policy advice. It may well be true that a small group of domestic producers would benefit from a higher yuan (which ones? We’re not quite sure, actually…). Alas, every single consumer would suffer for their betterment by having to pay higher prices. This in turn means that consumers will either have to cut back on their consumption, or lower their rate of saving. It seems obvious that this entails a lower standard of living for everyone but the favored few. Since less money will be available for either consumption or saving, there will also be less money available for investment. Capital formation is thus likely to slow, further impinging on future growth.