The Agenda

Here’s Why We Should Fight the Dragon: A Reply to Ramesh Ponnuru and Michael Strain

Editor’s note: The following post is by Oren Cass, who served as Governor Mitt Romney’s Domestic Policy Director in the 2012 presidential campaign. In it, he elaborates on several of the themes he first introduced in “Fight the Dragon,” his recent National Review cover story, and he replies to a critique from Ramesh Ponnuru and Michael Strain.

The last issue of National Review includes a response from Ramesh Ponnuru and Michael Strain to my essay in the prior issue arguing that the U.S. should aggressively confront China’s trade abuses. I appreciate their taking the time to respond, but wish they had engaged with the argument I made rather than simply trotting back out the standard “imports good, tariffs bad, trade deficits don’t matter” mantra that I was hoping to move beyond.

Indeed, their piece is an excellent case study of the phenomenon I described in my very first paragraph: “Conservatives, and most neoliberals, have embraced that view [of free trade as obviously positive] and consistently press for further liberalization while condemning as backward and reactionary ‘protectionism’ any proposed obstacles to the free flow of goods and services.” My goal was to explain the flaws in that view, so it is disappointing that the response is simply to have it shouted back louder. At times I thought I was reading a defense of NAFTA.

To understand just how narrow and incomplete their response is, it might be helpful to break the debate down into three discrete questions: First, what policies is China pursuing? Second, what is the impact of these policies on the United States? Third, to the extent that the impact is negative, what should the United States do?

On the first question, there seems not to be much disagreement. China is running roughshod over virtually every tenet of the free trade system. It blocks access to its own market and coerces firms that attempt to enter it (Ramesh and Michael make no mention of market access). It systematically steals intellectual property (they don’t use the words “intellectual” or “property” either). It manipulates its currency. And it uses both that currency manipulation and a range of subsidies to artificially depress the price of goods it sells into the U.S. market, with a focus on industries it has identified as most strategically important.

Ramesh and Michael do engage on this final element, taking issue with my comparison of subsidized selling to predatory pricing and correctly noting that — like Sasquatch — predatory pricing is frequently discussed but rarely found in nature. But that misses the (perhaps inartfully stated?) point. Regardless of whether China is actually selling below its cost, the subsidization has the same effect that predatory pricing would: driving other firms out of the market. And thus we should be worried about it for the same reasons: the resulting long-term cost in destroyed firms and eroded economic strength greatly exceeds any short-term benefit in cheap goods. As far as I can tell, they are not questioning that China subsidizes its producers. And they are not questioning that this harms domestic firms. Their Chicago School shout-out is just a distraction.

With China doing all these things, question two moves to the forefront: what is the impact on the United States? Here Ramesh and Michael stake out the claim that “free trade almost always benefits the country adopting it, regardless of the trade policies of other nations.” But that is a question-begging statement. Is what we have with China “free trade”? Surely it is not the case that the U.S. benefits from having its firms excluded from the Chinese market and coerced when they enter it. Nor can it be the case that the U.S. benefits from having the intellectual property of its firms expropriated. They address neither.

Instead, they focus solely on the question of whether cheap imports from China are beneficial to the United States. I read twice through their response to find a clear statement of their reasoning on this point to quote here, and came up empty. As far as I can tell, their argument is that because the classical model says free trade is beneficial, any criticisms of that model are incorrect. Kind of circular.

There are at least two reasons why we should be concerned by the flood of cheap imports generated by China’s economic strategy — not a flood of cheap imports per se, but rather a flood of artificially cheap imports that are strategically subsidized and buttressed by intellectual property theft and currency manipulation, coming from a centrally-controlled market closed to reciprocal imports. Not all influxes of cheap goods are equal, and while the classical model treats them as such our actual experience with China suggests otherwise.

The first problem is that we do not want to see our economy hollowed out. With actual free trade, some U.S. industries would see a decline in demand but others that had a comparative advantage would see an increase in demand. There would be economic disruption but at the end of the day a net economic gain. In practice we are seeing something very different: China’s imports flood the U.S. market, but China does not turn around and import U.S. goods in return. Instead, it hoards its surplus of dollars and loans it back. Which is a multi-step way of saying that it sends these imports across on credit. Applauding this is the equivalent of congratulating a friend for getting fired, lying on the couch while his skills erode, and buying everything he needs on a credit card. Because… hey, free stuff!

(Ramesh and Michael argue that savings and investment balances dictate trade balances but do not explain why causation should run in that direction and not vice versa. They also make the surprising claim that the policy decisions of the U.S. and its trading partners are irrelevant to where these balances land, as if government policy does not have the ability to influence savings and investment rates or the competitiveness of importers and exporters – an especially faulty premise when one of the parties is Communist.)

The second problem is one of distribution. Even if we took seriously the idea that running hundreds of billions of dollars in trade deficits while borrowing hundreds of billions of dollars is a healthy financial balance for the nation, we would still have to account for the uneven impact of that balance within the nation. Specifically, we would need to be prepared for substantially larger government redistributing a substantially larger share of national income. That has enormous economic and social consequences of its own.

(For more on the damage caused by the unprecedented surge of Chinese imports, see, e.g., the Wall Street Journal  that bastion of protectionism – summarizing the recent work of David Autor et al. And note that “Michael Spence, a Nobel Laureate economist at New York University [and a Senior Fellow at the Hoover Institution], said the new finding reflected how prevailing theories of trade aren’t up to the task of dealing with the breakneck pace of China and other developing economies.”)

To make matters concrete: let’s imagine that Ramesh and Michael write a book. And then let’s imagine that the Chinese government hacks into their computers, steals the manuscript, prints up 100,000 copies, and sends them over for free to bookstores and the Amazon warehouse. And let’s imagine that it is explicit Chinese policy to do this with every conservative policy book written for the next decade, and that there would be no legal recourse against retailers selling these copies. As a matter of economic policy, should the U.S. welcome this state of affairs because “free trade” is always good, or might there be cause for concern? Before you answer, remember: the book will be cheaper for consumers.

Having ignored (though not denied) many of China’s abuses, and having ignored (though not denied) many of the negative impacts on the U.S. economy, it is perhaps unsurprising that they take such umbrage upon arriving at the third question of what action the U.S. should take. Yes, if China’s only offense were offering low-cost goods to U.S. consumers then imposing a tariff in response would be foolish. But offering low-cost goods is one small and incomplete component of China’s trade strategy, and a tariff is only one small and incomplete component of my proposed response.

My goal in writing the initial essay was twofold. First, to lay out the full indictment of China’s trade abuses, emphasizing the ways its sophisticated economic strategy frustrates the classical economic model and the reasons it must be confronted. Second, to make the case that because withholding trade benefits is the primary tool by which international trading norms can be enforced, a credible willingness to disrupt the economic peace is critical to maintaining that peace and promoting prosperity.


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