Politics & Policy

Trade-Policy Reform, Because the Real World Is More Complicated than Ideology

Cargo ship at Qinddao, China (Reuters)
Good-bye Trans-Pacific Partnership, hello practical trade agreements with Japan and China.

All of a sudden, trade is back on the agenda. You may have heard something about that. You may have heard that President-elect Donald Trump said a thing or two about it on the campaign trail. At first observers either hoped or feared that his rhetoric on trade was just that, rhetoric — as, let’s be honest, it has been for most candidates from both parties, for many years. And yet the moves Trump has made since his election signal that he means it. He has appointed a trade critic, Wilbur Ross, as commerce secretary and given him oversight of the Office of the Trade Representative. Trump appointed Peter Navarro, a notorious critic of the current U.S.–China relationship, to a key trade post. And Trump’s antagonistic moves toward China, such as taking a phone call from the president of Taiwan, suggest a general readiness to “get tough on China.”

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What to make of this? As a conservative, I can recite the catechism of free trade and comparative advantage, chapter and verse. Trade between countries makes everyone better off and has geopolitical payoffs, protectionist measures are typically little more than protectionist giveaways, down with mercantilism and up with comparative advantage, and so forth. And I largely believe it. Free trade has largely been a boon to prosperity.

That being said, one reason I’m a conservative is that I believe the real world is always more complicated than any ideology (which is why central planners are bad). In the real world, trade hasn’t had only benefits.

Let’s start with the Rust Belt. Trade with China really did cost the United States a lot of jobs. And while you can argue that we were still made collectively better off because of it, it remains the case that specific communities were hit very hard — and, what’s more, as free-trade pollyannas failed to anticipate, never really recovered. A recent study showed that in areas negatively affected by trade, suicide rates rose, a startling indicator that speaks of a broad and distressing array of social and economic maladies.

Is it true that, as Trump says, China has been “ripping us off”? The short answer is yes.

More broadly, is it true that, as Trump says, China has been “ripping us off”? The short answer is yes. It’s worth rehearsing the many ways in which China and America play on an unlevel playing field. China subsidizes its manufacturers and exporters in countless ways, through direct state investment and state loans and indirect subsidies such as cheap loans from government-controlled or government-influenced banks. And the biggest subsidy of all has been a strikingly and artificially undervalued currency; although the renminbi has appreciated recently, the imbalance between it and the dollar has been strong for most of the trade relationship between the U.S. and China. On the other side, foreign companies face strong restrictions when trying to invest in China,and typically must do so through joint-venture partnerships. Such joint ventures don’t just act as protectionism and rewards for regime lackeys. They also facilitate a phenomenon that is taboo but by all accounts rampant: copying and outright theft of intellectual property and know-how. The latter is, if not actively encouraged, smiled on by the Chinese government. Free trade is great, but this is not “free trade.”

Take the Internet as an example. America invented it and made it available to the world. What’s more, U.S. territory includes Silicon Valley, an enormous source of wealth and comparative advantage. This has been an enormous benefit to Europe: its consumers reap trillions in the consumer surplus they get from using Google, Wikipedia, and other free, U.S.-made services. But it benefits less than the United States, because it doesn’t have Silicon Valley. Saying that whatever China gets away with in trade is no big deal because we still get the consumer surplus of cheaper goods is like saying that the United States wouldn’t be worse off if Silicon Valley was located in Europe, since we would still get to use Google for free. It doesn’t pass the smell test. (Note that saying this doesn’t deny the important point that free Google and cheaper consumer goods are still very good things to have.)

So, what to do about this?

If we could enter a time machine, we would probably negotiate different trade deals. At this point, not much can be done. Still, it should be emphasized that the key things to do about trade are only indirectly about trade. They involve investing in infrastructure, reforming welfare and higher education to make the U.S. workforce more competitive, and so forth. At the end of the day, such policies will always be the key to growth, and growth covers a multitude of sins.

That being said, can anything be done directly?

After Trump killed the already moribund Trans-Pacific Partnership, he claimed that he would do bilateral trade deals instead. He should. The economist and Japan expert Noah Smith has suggested starting with Japan. Given that it is a friendly country and an advanced economy, trade with Japan poses fewer socioeconomic problems than trade with developing nations does. It would also reassure our key ally in the Pacific that we are still committed to engagement in the region.

#related#Finally, instead of slapping new sanctions on Chinese imports (although threatening to do so as a negotiating ploy is fine), Trump should focus on the most egregious Chinese violations, such as trade-secret theft. Today, the United States typically uses a two-pronged approach. The FBI and the Justice Department do a fine job sussing out, investigating, and prosecuting individual instances. That effort should be boosted. But then the United States keeps asking China to please cut it out, and Beijing keeps saying yes while continuing to aid the country’s theft of trade secrets. The United States should indicate that such theft will be met with government reprisals against Chinese economic assets. Those could range from seizing Chinese assets in the United States to various forms of economic sanctions, and even to underground, intelligence-driven reprisals. Instead of fixing “trade,” which is here to stay anyway, or trying to negotiate another massive multilateral deal, which will always be watered down, the United States should tackle trade-secret theft, an issue on which it has a clear moral and legal claim and can achieve some tangible good.

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