Do Chinese raw material demands harm the U.S.?

Oil just hit $40 a barrel. Many analysts, such as Paul Krugman have noted the Chinese role in pushing up commodity and natural resource prices:

Lately we’ve been hearing a lot about competition from Chinese manufacturing and Indian call centers. But a different kind of competition – the scramble for oil and other resources – poses a much bigger threat to our prosperity.

I am surprised to see Krugman so qualifying his former belief in the virtues of free trade. Keep in mind that the core theory of international theory is a barter theory. “The Chinese buying oil” and “the Chinese selling bicycles” are just two sides of the same coin. If you don’t think one can harm the U.S., you shouldn’t, in general, think the other will harm the U.S. either. (Of course if your vision of free trade is we get the bicycles but give up nothing in return, we are worse off relative to that state of affairs!)

Here is another way to think of the logic. If the Chinese are bidding up the price of oil, they have found good uses for that resource. If they have a comparative advantage in buying oil, that benefits the rest of the world. Comparative advantage in production also will mean comparative advantage in buying certain inputs. The U.S. still has access to its previous production possibilities frontier. It must now decide whether it would rather spend its money on oil, or on something else, perhaps the outputs of the Chinese.

This analysis, of course, requires qualification. For instance Chinese uses of oil are often more polluting than American uses. This is a valid cause for concern. Distribution and transition effects can delay or modify the benefits of free trade. Some relative price shifts can occasion greater external effects than others. Theoretical economists also will recognize cases of “increasing returns” and “strategic trade policy” as providing possible exceptions to the benefits of free trade. Krugman in the past, of course, has stressed that these exceptions are unlikely to prove policy relevant.

But put all of these complicated cases to the side. The “first cut” approach to the problem should suggest that Chinese oil purchases, viewed in their proper general equilibrium terms, do not make the rest of the world worse off.

Addendum: Here is critical commentary from the ever-intelligent Randall Parker.


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