Politics & Policy

What Was Free about Our Trade Relationship with China before Trump?

Shipping containers at the Yangshan Deep Water Port in Shanghai, China, August 6, 2019. (Aly Song/Reuters)
China is following a familiar development script: invest in and protect industries that give the nation a strategic advantage.

In a long and blistering essay at The Bulwark, Thomas A. Firey takes aim at the Trump administration and its supporters, using the “Flight 93 Election” essay by Michael Anton as a foil. (As an aside, what a coup for Anton, that an election-year essay is still the focus of so much ire three years later!) Firey charges Trump and his nationalist champions with a number of deviations, in a case that they have all defected from a more humane Goldwater-Reagan ideal. If that’s your cup of tea, read the whole thing.

But what interests me is his case against the trade war with China. Now, Trump doesn’t make his trade war easy to defend. He seems to make impulsive decisions in it, and those add up to tactical errors, like the one had made this past month. The way he speaks about trade frequently evinces an ignorance about how tariffs work.

Yet that can be true of his critics on occasion, too. To Anton’s charge that liberal trading policy is bringing about diminishing returns to the United States, Firey responds this way:

On the contrary, the Principle of Comparative Advantage, which underlies the economic idea that trade is broadly beneficial, is as true today as it was after World War II. Crudely speaking, the principle holds that people are better off when many different producers focus on what they’re relatively best at making, and then trade their products with each other. That is especially true on a global scale, where different places have abundances of different natural resources, labor, and skills. By placing big-government constraints on industry’s access to foreign inputs and consumers’ access to foreign-made goods, protectionists harm both American workers’ incomes and consumers’ well-being.

In essence, Anton would (and Trump does) voluntarily inflict the same harms on the United States that warring nations impose on their enemies with embargoes and blockades. This is evidenced by America’s job losses and higher consumer costs  from Trump’s various trade wars, contributing to a slowing economy. The harm from these policies will grow over time, rendering the country poorer and less secure than it would be otherwise. The only beneficiaries from these policies are the U.S. businesses (and their financial backers) that face less competition.

Firey then takes aim at the idea that trade deficits in themselves hurt.

But I’m not at all convinced that the best way to describe our commercial relationship with China is merely the outworking of comparative advantage. Instead, China seems to be following, in broad outlines, the same basic development script that has been done in Japan, South Korea, Taiwan, and arguably even the United States: investing in and protecting industries and firms that give the nation an economic and strategic advantage.

Anton is simply correct, if the diminishing returns are measured in foreign policy. The United States more or less tolerated European allies who protected some of their key industries from our producers as they rebuilt after World War II. The same tolerance extended to other Asian economies that practiced an export-led industrial policy, even if it came at our expense. The return on this has been a remarkably stable set of alliances with Japan, South Korea, and converging interests across the large trading cities of the South Pacific. This system has grown stronger and is in many ways self-organizing at this point.

The decision to grant China most-favored-nation status did have some immediate logic to it. It paired a capital-rich country with a labor-rich partner. And there was hope — and for a time it seemed — that China would respond by liberalizing. Much foreign investment in China still goes through Hong Kong precisely because of the strong legal protections available there to outsiders. This liberalization would have been good for American interests, let alone the Chinese people. But instead of a liberal China, we now see the strengthening of an authoritarian capitalist system that is inventing novel forms of oppression for Uyghurs in Xinjiang province and clamping down on existing liberties in Hong Kong. Firey spends time in his essay worried about the gathering strength in illiberal states like North Korea under Trump’s presidency. Is there anything to say about China under Xi?

China’s comparative advantage, for a time, was cheap labor. But upon this, and a heavy-handed industrial policy, they captured industries that have up-skilled their workers and attracted foreign investment. China doesn’t have the natural resources that give it an advantage in semiconductors. And so its mercantilist policy is leading it toward a desperate scramble to gather these resources, especially in Africa.

The lopsidedness of our trade relationship is not just a function of comparative advantage. It’s a function of a Chinese policy that excludes many categories of American goods from being traded into China at all so it can build its own industries instead. That is partly why, even though China buys up so many dollars, it buys so few American goods.

Firey denounces Anton for wanting “an interventionist government that tightly guards who can participate in society and the economy, and how they do so.” But America’s trade relationship with China has strengthened such a government and has put it into a position to sell strategic technology to our allies and quiet our humanitarian objections to their persecution of Muslims and to crackdowns on Hongkongers.

Overall, I’d say this “free-trading relationship” is getting quite costly. Wouldn’t you?


The Latest