Recently I wrote part 1 of this article in the hope that with the coming of a new presidential administration we can start to think rationally about dealing with what is a tricky adversary. Tricky because it is clear that China is an existential threat to human liberty worldwide but also a great contributor to global wellbeing. It embodies not only the cruel machinery of authoritarianism but also the power of over a billion hardworking and innovative people. This brings us to another important topic when it comes to dealing with China, economic engagement. Should the US pursue trade and investment ties or should we continue the Trump administration’s crusade to wage economic warfare? The answer of course requires a deeper understanding of the problems at hand, rather than a binary view of China as a great evil or a benign victim of Western aggression.
The context behind Chinese economic growth
In 1978 China began pursuing limited market reforms that brought it out of the depths of the disaster that Maoism brought upon the country, to what it has become today. It went from a country of failing communal projects to a country that boasts gleaming skyscrapers, Michelin star restaurants, and the world’s second-largest economy. Of course, the country is still quite poor compared to true market economies such as its neighbours Taiwan, South Korea and Japan, but it is clear that limited market reforms have done well for the country. CSIS writes:
“Using the $1.90 per day extreme poverty line, the global poverty rate has declined significantly since 1990, when it stood at 36.2 percent of the global population (1.9 billion people), to about 8.7 percent (roughly 668.7 million people) in 2018. China was responsible for just over 60 percent of this decrease. Decades of rapid economic growth in China helped to lift 748.5 million people out of extreme poverty, dropping the country’s poverty rate from 66.3 percent to just 0.3 percent.”
This brings us to the problem with economic prosperity in China. Using Michael Pillsbury’s book The Hundred Year Marathon as a general insight, the Chinese Communist Party has essentially channelled the productive forces of prosperity into supporting the growth of its authoritarian regime. This is of course how all governments work, taking advantage of innovation and growth to support their own powers, but the Chinese government is plainly a clear and present danger to human liberty.
The current trade war has been counterproductive and more economic integration, not less, would produce better results
With a larger economy, the CCP has drastically overhauled its military, which poses a direct threat to US allies and interests in the Asia-Pacific. It has drastically expanded its security state, not only oppressing its citizens at home but actively exporting authoritarianism abroad. It engages in industrial policy where the Chinese government’s omnipresent hand in the private sector makes companies both a productive entity as well as a tool of the CCP to wield against its enemies. Finally, there is a safety concern that affects US consumers here at home when it comes to not only political risk associated with investing in Chinese products but also espionage and other subversive activities. These are all serious problems but, as the title of this article suggests, we need a nuanced approach that recognizes these threats and also understands what the best responses are.
The trade war
The last presidential administration kicked off a highly disruptive trade war against China with a long list of reasons, some of them good, many of them poor. It can be argued that China was deserving of economic sanctions and penalties because of their unfair economic practices that are not congruent with a free market economy. They also have a horrendous human rights record and seek to channel their economic growth to further expand their authoritarian goals. Using economic warfare rather than military escalation would be a preferable way of dealing with these issues, if it actually worked. Of course, some of the other reasons were blatantly protectionist and counterproductive. These included false narratives of China ‘stealing American jobs’ and attempting to artificially shift America’s trade deficit. Another goal that has some merits but also plenty of shortcomings is the idea of attempting to stunt Chinese economic growth, which is a sentiment many China hawks share. Although these are all compelling problems, we must realize that the current trade war has been counterproductive and more economic integration, not less, would produce better results.
Right off the bat we need to understand the true damage of the trade war, because there is certainly a romanticized image of sticking it to the CCP. In reality we have hurt ourselves with little noticeable benefit. AIER has published a summary of the damage this crusade has brought upon not only Chinese citizens but Americans as well. Some key points include:
- The 2018 tariffs directly claw back a quarter or more of the savings American households and firms realized from the 2017 cuts in individual and corporate tax rates.
- US importers passed a large portion of the new tax burden they directly faced onto consumers.
- While protectionists claim that tariffs are necessary to shield important domestic industries from competition, data from the steel and aluminium industries provide no evidence that these sectors have realized any gains.
Right off the bat we need to understand the true damage of the trade war, because there is certainly a romanticized image of sticking it to the CCP
Furthermore, the Brookings Institution writes: “A September 2019 study by Moody’s Analytics found that the trade war had already cost the U.S. economy nearly 300,000 jobs and an estimated 0.3% of real GDP. Other studies put the cost to U.S. GDP at about 0.7%. A 2019 report from Bloomberg Economics estimated that the trade war would cost the U.S. economy $316 billion by the end of 2020, while more recent research from the Federal Reserve Bank of New York and Columbia University found that U.S. companies lost at least $1.7 trillion in the price of their stocks as a result of U.S. tariffs imposed on imports from China.”
At the moment, it does not seem that China has shown any sign of relenting despite the costs on our end. The worst part is that the United States has more to lose in this trade war, being the richer and freer country. We are essentially throwing away some of our prosperity and our freedom to wage a trade war that has not only failed to show results but leaves the two countries involved and the whole world poorer.
Of course we must always be cautious of China’s increasing government control of its private sector, as Don Boudreaux explains here. Trade with China definitely leaves us open to potential economic manipulation and spyware but that can be mitigated by diversifying our trading partners. Furthermore, it would be in the best interest of the Chinese not to provoke one of their top trading partners. John Tamny explains why allowing greater economic engagement would lead to a greater vested interest in respecting their trade partners here. Ending the trade war and pursuing a reasonable level of economic integration, considering the potential risks, will not only lead to greater mutual prosperity but also global wellbeing.
The worst part is that the United States has more to lose in this trade war, being the richer and freer country
Lastly, the United States and other world powers have already maintained incredibly strict sanctions on countries like North Korea which have not achieved their goals of pushing for denuclearization. Although it is possible that China as a richer country is more sensitive to such measures, we must employ them strategically and carefully, which includes being realistic about what such policies will accomplish.
Leveraging shared mutual prosperity
Unless we have a realistic expectation of waging military war with China, which would likely see devastation on an unprecedented scale, it would be best to play the long game. That is attempting to forge a cautious relationship where we understand the issues at stake but also acknowledge the marginal costs of provocation. A more interdependent trade relationship with China will not only bring mutual economic benefit, it will also give the US more leverage in negotiations that really matter. Starting feuds over soybeans and steel like the Trump administration did is a clear example of not only going against our own free market values but also firing our bullets at trivial targets. It is a counterproductive and impossible goal to try to artificially bring back jobs via tariffs, but it’s also not a justifiable penalty. If we aim to economically punish China it should be because they are guilty of serious misconduct and even then we should ask ourselves if the policy at hand will lead to anything productive.
Furthermore, the Chinese authoritarian model is nowhere near as flexible as the liberal model in the US. Our economy can shift and adapt on its own to fit changing circumstances, whereas the Chinese economy is weighed down by excessive bureaucracy. Just look at how it reacted when Chinese billionaire Jack Ma simply critiqued its financial regulatory apparatus. Competition brought about by further economic integration with China will likely lead to more cracks in the system as Chinese business leaders and consumers start to ask questions.
China has always been an authoritarian country. Being open to the world and its influences is a touchy subject that dates back hundreds of years to the Ming Dynasty. Such isolationist tendencies are due to concerns regarding foreign influences, and it is unknown how well the current government can manage it. The United States is a melting pot, as the old analogy goes. It is unlikely global trade and co-operation will significantly derail our society; in fact we flourish from it. The same cannot be said about China, at least for the long-term rule of the Chinese Communist Party. This is but another reason why economic engagement may play out in our favour.
When it comes to our economic approach to China, it should be clear that we are all better off pursuing a strategy of trade and co-operation. Chinese economic prosperity does directly contribute to its authoritarian goals, but trade wars and isolation have not done anything to remedy the situation. Rather a strategy of economic integration will likely lead to not only mutually beneficial outcomes, but also greater leverage in the future if the need to take action arises.
This article was originally published by the American Institute for Economic Research and is here republished with permission.
