Economy & Business

Trump’s Proposed China Deal Won’t Help the Economy

President Donald Trump and Chinese President Xi Jinping shake hands after making joint statements at the Great Hall of the People in Beijing, China, November 9, 2017. (Damir Sagolj/Reuters)
It ignores cheating and free-market norms alike.

The Trump administration’s attempt to strongarm China into buying hundreds of billions of dollars’ worth of American goods to counteract America’s Chinese imports is based on broken economics. It reverses the traditional American policy of encouraging liberalization for transitional economies and, for all its bluster, would do nothing to address Chinese intellectual-property theft, the issue that was supposedly the impetus behind this whole policy push. China has refused the request so far, but if it acquiesces, it will not be good news.

It is popularly assumed that exports are better for the economy than imports are, but this is incorrect. The idea comes from an economic system utilized by European empires, “mercantilism” — a system from which Americans proudly broke away when they declared their independence. As Milton Friedman put it, mercantilism’s precepts are backwards:

The gain from foreign trade is what we import. What we export is a cost of getting those imports. And the proper objective for a nation as Adam Smith put it, is to arrange things so that we get as large a volume of imports as possible, for as small a volume of exports as possible.

Far from representing a problem, imported goods improve our quality of life through a combination of increased purchasing power, their vital role in growing domestic manufacturing, and higher employment. As Larry Kudlow, who recently joined the Trump administration, noted on NPR last year, “if we’re in a position of having a large trade deficit that means we’re growing, and we’re growing faster than the rest of the world. We’re importing capital, and that capital can build factories, can put up car plants, whatever. It’s fabulous.”

You don’t have to think too abstractly to find examples: The last time you went into a small business that accepts card payments, you might have seen a payment system, such as Square’s cash register, that was attached to an imported Android or iOS device. These units allow businesses to accept a wide variety of payments at a much lower cost than they would incur were they to set up such a system on their own. The idea behind the system is American — Square is based in San Francisco and employs thousands of people. Some of the technology, however, is not.

Is this a problem? No. Simply put, imports allow American businesses access to the materials they need to make their ideas reality, and as a result create economic value and jobs. Moreover, imports actually help American manufacturing. An executive at J. Press, the iconic American clothier patronized by everyone from Frank Sinatra to Martin Luther King Jr. to National Review’s own founder Bill Buckley, recently noted that import restrictions make it much more difficult for his company to make its suits in the U.S.: “We have full duty on fabric coming into the U.S. protecting mills that no longer exist. But if the same suit manufacturer has the garments made in Canada or Mexico, then there’s no duty on the fabric. It’s not a great situation.” Import restrictions on materials, whether steel tariffs or fabric taxes, mean that American manufacturers are artificially priced out of the market — ironically enough, as a result of measures that are supposed to protect American industry.

A China deal of substance would embrace the power and growth that comes from free trade, and leverage those benefits to shine a light on cheating in the market.

The lower cost of living that results from easy access to imports is significant. An HSBC study estimates that the the extra purchasing power provided by lowered trade barriers after World War II led to an additional $13,600 in income per American household. And it’s not just prices that are affected. Access to imports means that healthy produce is available no matter the season. This is why you can buy fresh flowers for winter holidays such as Valentine’s Day.

It is hard to imagine that sending away the things that we use domestically (which is what Trump’s coveted trade policy, if taken seriously, would entail) would improve our standard of living. And it would be flat-out disturbing should the U.S. attempt to mandate the acceptance of our exports.

The Chinese government may well go along with the Trump admistration’s proposal to reduce the “trade deficit” if U.S. negotiators treat that as their top priority, as statements from the president and Steven Mnuchin have suggested they may. China could, say, buy additional produce, which would look like a victory to the administration. But such an agreement would let China escape international pressure against its real cheating (especially on intellectual property and trade secrets). The Chinese government could point to the “deal” when asked about misconduct, especially if the U.S. gives it its imprimatur. If the aim is solely to achieve a superficial reduction in the “trade deficit,” this outcome would be salutary. But if the aim is to ensure good business behavior across the world, the maintenance of a strong international trading system, and an arrangement in which property rights are respected and violators are taken to account, it would be a disaster.

A China deal of substance would embrace the power and growth that comes from free trade, and leverage those benefits to shine a light on cheating in the market. What we have heard so far ignores cheating and free-market norms alike.

Jibran Khan is the Thomas L. Rhodes Journalism Fellow at the National Review Institute.

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