What Next For China

11/20/20

When it comes to international trade, it’s pretty clear that the incoming Biden administration will try to move the US away from the go-it-alone orientation of the Trump administration. Where Trump has denounced previously negotiated trade agreements and turned his back on the World Trade Organization (WTO), the globally recognized body that sets international trading standards and settles international disputes, the Biden administration will spend time mending fences and trying to regain the leadership position that we once had in international trade. Unfortunately, the state of our trading relations with China will complicate that effort.

Here’s some background: China and the US barely traded prior to the enactment of the US-China Relations Act of 2000 passed during the Clinton administration. This bill normalized trade relations between our two countries and allowed for China’s entry to the World Trade Organization. It paved the way for a dramatic expansion of bilateral trading to the point where China now ranks pretty much neck and neck with Canada and Mexico as one of the top three US trading partners.

Along the way, a sentiment in the US started to grow that China had been engaging in unfair trading practices. Among the charges voiced by China critics is that China has unfairly managed currency exchange rates and heavily subsidized key industries to make Chinese goods more competitive on world markets. They also forced multinationals to share technologies; and they engaged in the theft of intellectual property. While these charges may have merit, I fear that the US response toward China may be somewhat disproportionate to the offenses. I expect that much of the criticism of China stems from resentment and envy, rather than a reaction to foul play.

Several of these complaints may deserve some further scrutiny: (1) We, in the US, also heavily subsidize key industries. What’s good for the goose… (2) The charge that China forced US companies to share their technologies may be overbroad. Presumably, affected companies opted into those arrangements, when they might have otherwise declined. And (3), while intellectual theft can’t be condoned, China’s behavior may serve to precipitate an overdue reconsideration of US policy relating to intellectual property. Copyright and patent protections afforded to US companies may be overly generous to the US owners to the detriment not only of international customers and competitors, but of their domestic counterparts, as well.

Within the past two decades, China effectively transformed itself from a backwater entity to an economic powerhouse. Their competitiveness has contributed to the loss of American jobs in the manufacturing sector, and their expanding role in international markets has begun to threaten the hegemony of the US in this realm.

Critically, the growth of trade with China brings winners and losers. The winners are those in the US who are now able to buy cheaper goods sourced from China, as well as American companies now selling to markets that had previously been closed to them. The losers are those who operate in US businesses that are forced to scale back or exit. That’s the nature of capitalism. In any case, our policy seems to have totally aligned with the losers, without giving due consideration to the winners.

As a nation, we have the choice of protecting jobs that are threatened by international competitors, inviting a cycle of retaliation, or we can allow the market to work and adjust our safety net to transition affected workers into other productive endeavors. Thus far, we’ve opted for the former. Rather than relying on the WTO to address the US concerns, Trump unilaterally imposed tariffs on a host of Chinese goods over a span of months starting in 2018. As was widely anticipated, these actions fostered retaliatory tariffs that China imposed on US goods. And now we’re stuck in the middle of a trade war.

As any reputable economist will tell you, trade wars serve narrow interests (i.e., protected industries), at the expense of those parties that would otherwise benefit from the trade. When trade occurs, both sides of the transaction improve their lots. Otherwise it wouldn’t happen. For a country that prides itself as fostering free markets for free men, tariffs are an anathema. Pity that the party that had historically prided itself as a champion of small government fails to recognize the intrusion that tariffs represent.

Right-thinking people should recognize the folly of Trump’s policy with China. Unfortunately, Trump has poisoned the dialogue with his lies and bombast, and Biden is stuck with something that too many Americans see as a legitimate and appropriate policy orientation, when it’s not. Turning the page on the current, misguided policy with China won’t be easy, but that’s what the Biden administration should strive to do. And we should start by stopping the China-bashing.

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Kawaller holds a Ph.D. in economics from Purdue University and has held adjunct professorships at Columbia University and Polytechnic University.

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Ira Kawaller

Ira Kawaller

Kawaller holds a Ph.D. in economics from Purdue University and has held adjunct professorships at Columbia University and Polytechnic University.

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