Forcing DiDi and Alibaba to toe the Communist Party line may help Xi build a police state but will stall the nation’s dynamic industry.
“Investors have to rethink the entire China structure,” David Kotok of Cumberland Advisers said last week. For Hong Kong, the One Country, Two Systems principle was “dead.” As for the crackdown on some of the nation’s tech giants, the Beijing government’s treatment of Alibaba “is not a one-off. Neither is DiDi. Everything China touches must be viewed with suspicion.”
Wait, you’re saying that investing in the other side in the early phase of Cold War II might have been a bad idea? You’re telling me that “long totalitarianism” was not a smart trade?
For the past three years, I have been trying to persuade anyone who would listen that “Chimerica” — the symbiotic economic relationship between the People’s Republic of China and the United States of America, which I first wrote about in 2007 — is dead. The experience has taught me how hard it can be for an author to kill one of his own ideas and replace it with a new one. The facts change, but people’s minds — not so much.
Chimerica was the dominant feature of the global economic landscape from China’s accession to the World Trade Organization in 2001 to the global financial crisis that began in 2008. (I never expected the relationship to last, which was why I and my co-author Moritz Schularick came up with the word: Chimerica was a pun on “chimera.”) At some point after that, as I have argued in Bloomberg Opinionpreviously, Cold War II began.
Unlike with a “hot” war, it is hard to say exactly when a cold war breaks out. But I think Cold War II was already underway — at least as far as the Chinese leader Xi Jinping was concerned — even before former President Donald Trump started imposing tariffs on Chinese imports in 2018. By the end of that year, the U.S. and China were butting heads over so many issues that cold war began to look like a relatively good outcome, if the most likely alternative was hot war.
Ideological division? Check, as Xi Jinping explicitly prohibited Western ideas in Chinese education and reasserted the relevance of Marxism-Leninism. Economic competition? Check, as China’s high growth rate continued to narrow the gap between Chinese and U.S. gross domestic product. A technological race? Check, as China systematically purloined intellectual property to challenge the U.S. in strategic areas such as artificial intelligence. Geopolitical rivalry? Check, as China brazenly built airbases and other military infrastructure in the South China Sea. Rewriting history? Check, as the new Chinese Academy of History ensures that the party’s official narrative appears everywhere from textbooks to museums to social media. Espionage? Check. Propaganda? Check. Arms race? Check.
A classic expression of the cold war atmosphere was provided on July 1 by Xi’s speech to mark the centenary of the Chinese Communist Party: The Chinese people “will never allow any foreign force to bully, oppress, or enslave us,” he told a large crowd in Beijing’s Tiananmen Square. “Anyone who tries to do so shall be battered and bloodied from colliding with a great wall of steel forged by more than 1.4 billion Chinese people using flesh and blood.” This is language the like of which we haven’t heard from a Chinese leader since Mao Zedong.
Most Americans could see this — public sentiment turned sharply negative, with three quarters of people expressing an unfavorable view of China in recent surveys. Many politicians saw it — containing China became just about the only bipartisan issue in Washington, with candidate Joe Biden seeking to present himself to voters as tougher on China than Trump. Yet somehow the very obvious trend toward cold war was ignored in the place that had most to lose from myopia. I am talking about Wall Street. Even as China was ground zero for a global pandemic, crushed political freedom in Hong Kong and incarcerated hundreds of thousands of its own citizens in Xinjiang, the money kept flowing from New York to Beijing, Hangzhou, Shanghai and Shenzhen.
According to the Rhodium Group, China’s gross flows of foreign domestic investment to the U.S. in 2019 totaled $4.8 billion. But gross U.S. FDI flows to China were $13.3 billion. The pandemic did not stop the influx of American money into China. Last November, JPMorgan Chase & Co. spent $1 billion buying full ownership of its Chinese joint venture. Goldman Sachs Group Inc. and Morgan Stanley became controlling owners of their Chinese securities ventures. Just about every major name in American finance did some kind of China deal last year.
And it wasn’t only Wall Street. PepsiCo Inc. spent $705 million on a Chinese snack brand. Tesla Inc. ramped up its Chinese production. There were also massive flows of U.S. capital into Chinese onshore bonds. Chinese equities, too, found American buyers. “From an AI chip designer whose founders worked at the Chinese Academy of Sciences, to Jack Ma’s fast-growing and highly lucrative fintech unicorn Ant Group and cash cow mineral-water bottler Nongfu Spring Co., President Xi Jinping’s China has plenty to offer global investors,” my Bloomberg opinion colleague Shuli Ren wrote last September.
Recent months have brought a painful reality check. On July 2, Chinese regulators announced an investigation into data security concerns at DiDi Global Inc., a ride-hailing group, just two days after its initial public offering. DiDi had raised $4.4 billion in the biggest Chinese IPO in the U.S. since Alibaba Group Holding Ltd.’s in 2014. No sooner had investors snapped up the stock than the Chinese internet regulator, the Cyberspace Administration of China, said the company was suspected of “serious violations of laws and regulations in collecting and using personal information.”
The cyberspace agency then revealed that it was also investigating two other U.S.-listed Chinese companies: hiring app BossZhipin, which listed in New York as Kanzhun Ltd. on June 11, and Yunmanman and Huochebang, two logistics and truck-booking apps run by Full Truck Alliance Co., which listed on June 22. Inevitably, this nasty news triggered a selloff in Chinese tech stocks. It also led several other Chinese tech companies abruptly to abandon their plans for U.S. IPOs, including fitness app Keep, China’s biggest podcasting platform, Ximalaya, and the medical data company LinkDoc Technology Ltd.
To add to the maelstrom, on Thursday Senators Bill Hagerty, a Tennessee Republican, and Chris Van Hollen, Democrat of Maryland, called on the Securities and Exchange Commission to investigate whether DiDi had misled U.S. investors ahead of its IPO. Also last week, U.S. tech companies such as Facebook, Twitter and Google came under increased pressure from Hong Kong and mainland officials over doxxing, the practice of publishing private or identifying information about an individual online.
For several years, I have been told by numerous supposed experts on U.S.-China relations a) that a cold war is impossible when two economies are as intertwined as China’s and America’s and b) that decoupling is not going to happen because it is in nobody’s interest. But strategic decoupling has been China’s official policy for some time now. Last year’s crackdown on financial technology firms, which led to the sudden shelving of the Ant Group Co. IPO, was just one of many harbingers of last week’s carnage.
The proximate consequences are clear. U.S.-listed Chinese firms will face growing regulatory pressure from Beijing’s new rules on variable interest entities as well as from U.S. delisting rules.
The VIE structure has long been used by almost all China’s major tech companies to bypass China’s foreign investment restrictions. However, on Feb. 7, the State Council’s Anti-Monopoly Committee issued new guidelines covering variable interest entities for the first time. Recognizing them as legal entities subject to domestic anti-monopoly laws has allowed regulators to impose anticompetition penalties on major VIEs, including Alibaba, Tencent Holdings Ltd. and Meituan. This new framework substantially increases risks to foreign investors holding American deposit receipts in the tech companies’ wholly foreign-owned enterprises. For example, Beijing could conceivably force VIEs to breach their contracts with their foreign-owned entities. In one scenario, subsidiaries of a Chinese variable interest entity that are deemed by Beijing to be involved in processing and storing critical data could be spun out from the VIE — just as Alibaba was reportedly forced to spin out payments subsidiary Alipay in 2010.
The stakes are high. There are currently 244 U.S.-listed Chinese firms with a total market capitalization of around $1.8 trillion, equivalent to almost 4% of the capitalization of the U.S. stock market.
In my recent Defining Ideas article titled “A Refresher Course on Free Trade,” I made the case for free trade. A large part of the economic case is that free trade makes people in the country that adopts it better off than if their government hadn’t adopted it. It makes imports cheaper, allows consumers to get a more varied range of goods, and causes labor and capital to be allocated to areas of the economy where they are most productive.
In the United States in recent years, there have been two main objections to free trade. The first is that when free or freer trade is introduced into a particular sector, producers in that sector, both owners of capital and laborers, will be worse off. Therefore, argue some of the people who make this point, either trade shouldn’t be liberalized or, at least, introduction of trade should be accompanied by government spending to compensate the losers. The second objection is that free trade benefits mainly the wealthy and does little for the workers who are living on the economic edge. The first objection is often true in the short run but almost always false in the long run; it also applies to any economic change whether that change is caused by international trade or purely domestic economic interactions; in short, the objection proves too much. The second objection is simply false.
Winners, Losers, and Compensation
In my earlier article, I pointed out that if the market for sugar were opened to unrestricted imports from other countries, the price of sugar in the United States would fall and US sugar producers would be hurt. That’s all true in the short run. In the long run, say ten years from now, it’s not clear that those who produce sugar now would be worse off then. Owners of capital would have had ten years in which to find alternate industries in which to invest and workers would have had ten years in which to find other jobs.
Still, ten years is a long time. Those who lose jobs can find others at lower wages but they might be employed at these lower wages for at least a few years before they build their skills and earn wages comparable to the ones they lost because of free trade. So one can understand why people who see the benefits of free trade want a government policy to subsidize the losers for a few years. Those who want such subsidies tend to focus on workers who lose their jobs but the same thinking would presumably apply to business owners, including shareholders, who suffer a wealth loss due to free trade.
There are a number of problems with such proposals, though. First, government is notoriously bad at targeting help to groups sorted by their particular circumstances. When politicians sense a gravy train coming, they tend to lobby their colleagues to include other groups and causes. We saw this with the initial Biden proposal for infrastructure. It included a large amount of money for activities that have never been considered to be infrastructure, activities like day care.
Second, there is nothing special about free trade. Indeed, in a large economy like that of the United States, most trade is not across borders but is between people within the US borders. In 2019, imports were about 14.6 percent of gross domestic product. That sounds high, and is high, but that number confirms that most trade in the United States is between and among people in the United States. When a new technology or even a new way of running a business helps consumers, it also destroys many businesses and hurts workers who lose their jobs or who must work at a lower pay to keep their jobs.
We don’t need to go back far to see such examples. When I taught in the business school at the University of Rochester in the late 1970s, some of my evening MBA students who worked at Kodak called it the “big yellow money machine.” Kodak was riding high on the technology that innovator George Eastman and his successors had created and perfected. But digital cameras in the 1980s and 1990s and, later, cell phones that got better and better at taking still shots and movies, virtually destroyed the market for Kodak’s product. It’s true that part of the causes was international trade in cell phones. But even without cell phones from other countries, US cell phone producers were plenty capable of competing Kodak into bankruptcy.
Few of those who advocate compensating those who lose due to expanded trade across borders advocate compensating those who lose due to increased trade within borders. I hasten to add that I’m glad that they don’t. But the principle is the same.
Are the Rich the Main Gainers from International Trade?
In early 2016, UCLA professor Mark Kleiman wrote:
But the bottom line is that all of the gains, not merely from trade but from economic growth, have been concentrated in the hands of a relative few.
I was surprised when I read that. Historically, the opposite has been the case. Before considering recent history, let us turn to the famous repeal of the British Corn Laws, which happened in June 1846. The Corn Laws disallowed the import of wheat (which the British called corn) unless the domestic price of wheat hit a very high level. In practice this meant that imports of wheat were effectively banned. Because lower-income people spent a much higher percent of their income on food than higher-income people did, repeal of the Corn Laws helped low-income people disproportionately. Those who lost were primarily rich owners of agricultural land who, after 1846, had to face competition from other countries.
In a recent discussion to celebrate the 175th anniversary of the repeal of the Corn Laws, British historian Steve Davies of the Institute of Economic Affairs in London put it well. The successful popular campaign to repeal the Corn Laws, he observed,
fixed in the minds of the British working class in particular, right up to the present day, the profound belief that free trade is good for the poor and the working man and woman and that protectionism is basically a conspiracy by the rich and special interests to screw over the working class.
Now let’s turn to recent history, which is quite consistent with the nineteenth-century British history.
Although trade may hurt various low-income people in their role as competing workers, it helps lower-income people, as consumers, proportionally more than high-income people. The reason is that the particular goods that are traded tend to be those that are a larger proportion of a lower-income household’s income. Think about who shops at Walmart and where Walmart buys many of the items it sells. Lower-income people are disproportionately represented among Walmart shoppers and many of the items, typically low-end, that Walmart sells are imported, especially from China. In an article in the Quarterly Journal of Economics, UCLA economist Pablo D. Fajgelbaum and Columbia University economist Amit K. Khandelwal lay out the facts about the gains from trade.
In correspondence with me about their findings, Professor Khandelwal considered the gains that would be captured by various income groups if prices for imports fell by 5 percent. For food, people at the 10th percentile—those whose income is below that of 90 percent of the population—would have an annual gain of 0.39 percent of income. People in the 90th percentile and 99th percentile, by contrast, would gain zero. Similarly, a 5 percent price cut for manufactured goods would raise real income for people at the 10th percentile by 0.81 percent and for people at the 90th and 99th percentile by only 0.22 percent and 0.10 percent, respectively.
In many cases, moreover, those who lost their jobs due to the opening of trade had had substantially higher incomes than the lower-income people who made out big from trade. Consider the case of clothing. The US economy lost 650,000 apparel jobs between 1997 and 2007, which was the period during which Chinese imports increased so rapidly. Not all of those people found jobs at a pay as high as they earned before. That’s the downside. The upside is that, with the increase in international trade, clothing became much cheaper. In his book The Rise and Fall of American Growth, Northwestern University economist Robert J. Gordon reports that between 1980 and 2013, clothing prices fell by an annual average of 2.6 percent. Compounded over the period from 1997 to 2007, that’s a 24 percent drop. The actual drop is probably even more because the opening to China brought down clothing prices annually even more quickly than the average annual drop from 1980 to 2013.
For 2019, the latest data available, households in the bottom two quintiles, which is about 53 million households, spent an average of $1,032 per year on clothing. That’s out of an average after-tax income of $22,591. So they spent 4.6 percent of their income on clothing. Because clothing prices fell over that time, they would have bought more clothing at the lower price. So we will understate their gain if we assume that they were insensitive to price and bought the same amount of clothing that they would have at the higher pre-expanded-trade price. Even assuming no further drop in clothing prices after 2103, the 24 percent drop in price was important for a household with such limited means. The clothing they would have bought in 1997 would have cost an inflation-adjusted amount of $1,358. So the average family in the two bottom fifths of the income distribution saved $326 on clothing alone. Over 53 million households, that is a gain of about $17.3 billion. Assuming that the 650,000 people who lost their jobs lost as much as $10,000 each per year, which is probably an overestimate, their loss was $6.5 billion, which is less than 38 percent of the gain. Moreover, the average worker in a clothing factory in the United States, along with her or her family, almost certainly earned more than $22,591, the average income of the bottom two-fifths.
There may be other objections to free trade but two objections fail. First, even though some people lose in the short run when trade is made freer, almost everyone gains in the long run. Second, those who gain disproportionately from free trade are lower-income people, not higher-income people.
When you break it down, Donald Trump’s trade policy was simple. “No more bad deals,” he’d say while flexing America’s economic muscle and bringing miscreant trading partners back into line.
Joe Biden, on the other hand, has yet to make his trade priorities clear.
There are a few things we do know. One, he’s eager to reunite with partners on the world stage. With the pandemic and climate change as the centerpieces of his administration’s international efforts, we can expect trade pacts to be less important. Two, the president says he wants to fix or build back America before he launches any trade initiatives. Three, he wants to be sure trade initiatives will be “worker-centered” but hasn’t explained what that would look like.
Going forward, the priorities for U.S. trade policy overall ought to be bringing U.S. jobs and manufacturing back from overseas and encourage emerging industries to develop new technologies here in the United States. Internationally, as an example, the White House must convince much of the world to eschew products made by Chinese-owned Huawei when building out 5G networks.
At home, the president and his trade team need to make sure that the innovative activities of companies creating emerging technologies on which we’re all dependent are not being crushed by government bodies like the U.S. International Trade Commission, a six-member, independent, quasi-judicial federal agency that settles certain kinds of trade disputes.
Of late, the commission is a place where non-practicing entities (they’re more commonly called “patent trolls”) are violating patent rights. Through expensive and extensive litigation, patent trolls ask the International Trade Commission to find that a company manufacturing and innovating some product is making illegitimate use of a non-practicing entity’s intellectual property — and, because of it, any device using said infringed-upon patents must be banned from the U.S. marketplace.
That is exactly what Swedish telecom giant Ericsson is asking the commission to do to Samsung and a range of other smart devices and its 5G-related infrastructure equipment. Ericsson is a telecom infrastructure equipment manufacturer, but these days close to a third of its operating profit comes from IP licensing.
Ericsson is currently negotiating with Samsung to renew a patent cross-licensing agreement. Instead of continuing to negotiate, Ericsson is using the threat of a massive U.S. import ban on Samsung products to try to get its way.
If Ericsson’s backup strategy prevails and Samsung devices including cell phones and tablets are excluded from the U.S. market, or if it gets the International Trade Commission to block one of its key competitors in the 5G infrastructure market, it would be a disaster. The digital divide would widen just as the Biden Administration is proposing trillions in new infrastructure spending including broadband.
Spending billions of taxpayer dollars on broadband while at the same time excluding Samsung infrastructure equipment and devices from the market makes no sense. The International Trade Commission will have given Ericsson dominant market power in 5G infrastructure equipment and limited device choices for U.S. consumers. It would be shockingly counterproductive to give Apple a virtual monopoly on sales of sophisticated phones while opening the door to Chinese manufacturers like Huawei, ZTE or their home-grown rivals to service the rest of the U.S. market at a time when the U.S. government is working to prevent Chinese tech attacks on U.S. information security.
There is a better way to settle what is essentially a dispute over patent royalties – the traditional court system.
Ericsson took its complaints to the International Trade Commission because it knows that an exclusion order would nearly cripple its rival. At a minimum, it would give it tremendous negotiating leverage.
It’s time for the president to propose and for Congress to reform the International Trade Commission by addressing weaknesses that enable these kinds of manipulative and illegitimate cases.
For a variety of reasons, the U.S.-China rapport established by Richard Nixon has cooled considerably over the past few years. Some experts believe a return to what seemed to be a mutually beneficial status quo is possible once the Trump-era trade war comes to an end.
That’s a fantasy. The relationship between the two superpowers has been on the decline for some time, largely due to unfair trade practices on the part of the Chinese. They do not play fair and no amount of waiting on the part of the U.S. will cause them to change their stripes.
China makes billions by forcing U.S. companies to turn over valuable intellectual property in exchange for entry to its markets. Refusal to cooperate cuts off access to more than a billion potential customers. If America’s leaders aren’t demanding a change, a demand backed up with action, then what incentive is there for Beijing to change its policy?
Most American businesses have been advised by policymakers to wait. They’re stuck, hoping for relief — from international trade organizations to which the Chinese belong (thanks to the U.S. insisting they be admitted) or from U.S. politicians. Nothing will happen unless the pressure on Beijing is maintained.
When President Donald Trump talked about bad trade deals, he usually didn’t mention the World Trade Organization, the U.S. International Trade Commission, and the other multi-national and U.S. governmental bodies that are supposed to referee disputes. Maybe he should have, so that what these organizations accomplish – or more importantly fail to accomplish – will get the scrutiny needed.
Changes must occur. The ITC, for example, continues to show itself to be toothless. It’s failed to be tough on the non-practicing business entities known as “patent trolls” that exist almost solely to make the potentially lucrative charge that deep-pocketed entities have infringed on intellectual property rights so how can we expect tough action from them against China.
Patent trolls are a serious problem and a danger to economic growth and to consumers. They hinder innovation and can force higher prices on consumer technology and other goods now considered critical to life in the 21st century. Yet the ITC refuses to crack down on them, leaving China well-positioned to benefit from the mess they cause.
The commission is currently considering claims lodged by the Irish patent troll Neodron that its patents were infringed upon by major global tech companies including Apple, Microsoft, and Dell. It wants the ITC to grant an exclusion order baring these companies from selling all their major touchscreen mobile devices in the U.S. market.
What’s happening has been likened by some to extortion, with the productive companies being pressured to pay the complaining troll off rather than leave things to the ITC to decide.
Imagine if the ITC decides the issue in Neodron’s favor. The cost of smartphones, tablets, computers, and other devices covered by its order would immediately skyrocket to provide the rents Neodron is demanding. According to some estimates, nearly 90% of smartphones and tablets currently available in the U.S. market would disappear, be replaced by devices from China. The range consumers have when choosing a device would be narrowed while the prices for what they could buy would rise.
China already has a clear lead in developing and deploying 5G wireless devices. Given the critical technology race between the U.S. and China over who will dominate in 5G, how can a U.S. agency even consider a litigation outcome that forces U.S. consumers to buy their 5G devices (as well as their other touchscreen devices) only from China?
Tensions between the world’s two largest economies are already heightened, in part because the U.S. accused China of sponsoring criminal hackers trying to gain access to private data from biotech firms around the world working on coronavirus vaccines and treatments. The FBI said the Chinese government was acting like “an organized criminal syndicate.”
Neodron’s complaint to the ITC places the proverbial thumb on the scale for the Chinese and the technology they manufacture. If they win it would devastate the U.S. tech sector while helping Chinese tech companies gain a greater share of the global market, probably permanently. Like all patent trolls, Neodron’s claim cannot justify this kind of disproportionate and devastating result.
The ITC doesn’t have to go along with this. They can institute policy revisions that will thwart the efforts of Neodron and other patent trolls like them to use the ITC for monetary gain. Those changes should be made now before any more damage is done. There are bigger fish to fry.
Exactly how the COVID-19 virus found its way to humans isn’t entirely clear. But it is clear is that once the virus was out and people were dying, the communist Chinese regime did little to stop the world from getting sick. While they quietly locked down travel within China to limit spread of the virus, they did nothing to stop Chinese global travel that spread it and they employed the World Health Organization to support their claims that there was nothing to worry about. And when America locked down travel from China, they howled racism.
The communist regime also began hoarding medical supplies and equipment, while telling the world the virus wasn’t transmitted via human contact. Once more was known, China began to blame others — including Italy and the U.S. for the virus.
Everything they appear to do is motivated by gaining power and control over their own people and the world’s population. They see everything — not merely missiles, bombers and submarines, but also food, medicine, shipping, trade, etc. — as a weapon to be used to strengthen their stranglehold on power.
We must remember that this communist regime murders its own citizens in death camps and harvests their organs. It brutally oppresses the people of Hong Kong. It spies on its own people and tracks their movement so that it can punish them for worshiping or visiting the “wrong” friends.
These unpleasant truths have caused America to wake up and ask if it should be so dependent upon China for critically important things like medicine, medical equipment and other goods and services required in the high-tech world. The answer is now an obvious no.
We should also examine how China has been making America more and more dependent in other areas. We now understand this is not merely an economic issue, it goes to the very health, strength and sustainability of our nation’s long-term survival.
International trade is a huge driver of every nation’s economic health, and 90% of all global trade is transported by ship. It should not surprise you to learn that China has quietly made itself the dominant player in international shipping. They’ve purchased strategic ports around the globe and are by far the world’s largest subsidizer of shipbuilding. This is all part of the regime’s strategic plan to dominate world trade and make itself the world’s sole economic and military super-power. You can be 100% sure this power will not be used to promote freedom, opportunity or security. Look at Hong Kong and you know how that power will be abused.
The U.S. used to be a major player in international shipping and shipbuilding. But for a variety of reasons, the U.S. is now a minor player. Currently, China is building 1,291 ocean-going ships. The U.S. has only 8 under construction. Bangladesh meanwhile is building 56. Let that sink in. The U.S. now operates less than 1/2 of 1 percent of ocean-going maritime ships.
In the last several years, foreign powers and some domestic voices have been pushing for the U.S. to allow foreign shippers to take over domestic shipping routes within the territorial waters of the U.S. To do that, would require the repeal or substantial revision of the Jones Act, a move China would love. They could run their ships up and down the Mississippi with high tech electronics in our heartland gathering intelligence and at the same time make America entirely dependent upon them for our shipping and commerce.
This is why the Jones Act is needed now more than ever. It allows for any nation to ship goods to or from America, but within America and between its internal ports, shipping must be handled by American ships and American crews. These American ships and American crews work in our heartland and when the U.S. military needs their sealift capability, they stand at the ready. Do we really want to ask China to fill that role?
The purposes of the Jones Act are something that even free market champion Adam Smith endorsed in his seminal work, The Wealth of Nations. Moreover, the very first Congress, populated by signers of the Constitution and the Declaration of Independence passed the first version of the Jones Act.
The idea that we should let China expand its power within the territory of the United States is simply insane. Standing by and letting China tighten its grip on international commerce will eventually be our downfall if we don’t wake up. If this wasn’t clear before this pandemic, it is now painfully obvious.
A game where only one side plays by the rules is rigged. We have now locked ourselves in an embrace with a corrupt regime, and it has not been to our benefit economically or morally.
The United States and China have traded since the early days of our republic, but only recently has the scale of that trade become a political issue. More than any other point, Donald Trump’s rhetoric against outsourcing to China gave him the blue-collar Midwestern votes that made up his margin of victory in 2016. His election was a break with the generation-long bipartisan consensus that more and freer trade is better, whether the trading partner is a liberal democracy that respects the rule of law or a communist dictatorship where unfree people labor in unsafe conditions for government-suppressed wages.
Even to call trade with China “free” is a misnomer. Besides the minor tariffs still in place, there is also an uneven use of non-tariff trade barriers. Chinese goods enter our markets cheaply and freely because we agree to follow our agreements, our laws, and the rules of the World Trade Organization (WTO). Our goods, on the other hand, are subject to arbitrary restrictions by the communist government, while Chinese companies and government routinely infringe our intellectual property rights. The high hopes of free trade have been replaced with humiliation and decline.
Free trade with unfree nations smells like a conspiracy: the rich get richer by paying peanuts for production, while blue-collar workers lose their jobs and are bought off with cheap goods and more welfare. The truth is not criminal, just criminally stupid.
In classic American broad-mindedness, when our system won the Cold War, we bent over backward to befriend our former enemies. Free trade would lead to a prosperous, freer China, the thinking went. We thought that lowering our guard would turn a foe into an ally. Instead, the American worker just got sucker-punched.
One of the best examples of the perils of this uneven trade is the dispute over rare earth elements. Rare earths—a group of 17 different elements—are plentiful, but difficult to mine and environmentally hazardous to process. In recent years, rare earths have become more important, as many are used in modern electronics and military and high-tech applications.
At present, about 80 percent of the world’s production of rare earths comes from China. That undoubtedly suits China just fine, and the western companies that have outsourced industrial production there don’t have a problem with it, either. After all, if your iPhone comes from China, why shouldn’t its components?
But China’s dominance of the field has other effects. While the United States once led the world in rare earth production, we now import the vast majority of these minerals from China. The loss in mining jobs is bad enough, but the extreme concentration in the field means that China essentially controls the world’s access to a vital industrial and military resource.
Free-market conservatives confronted with a situation like this one usually laud the efficiency gained by trade and competition. They are not completely wrong: it is more efficient to have third-world workers in an unfree country mining hazardous materials. Mining is a dirty, dangerous job: why not let someone in a country with terrible environmental laws and lax workplace safety rules do it?
If rare earths were only used for toys and video games, that might be a financially acceptable albeit morally dubious answer. The military applications, though, make this a much bigger problem. Once China achieved a near-monopoly on rare earths, their position was ripe for abuse.
And, wouldn’t you know it, they abused it. Between 2009 and 2012, China drastically reduced its export of rare earths and two other important metals, tungsten and molybdenum. In a free economy, that would encourage production in sources outside of China, where the artificial scarcity Beijing imposed would make it worthwhile to produce at higher prices.
In 2012, U.S.-based Molycorp, attracted to the higher prices that resulted from the Chinese government’s efforts to boost profits by restricting REE [i.e., rare earth elements] exports, made plans to ramp up domestic REE production, investing nearly $800 million in state-of-the-art mining operations in California. At the moment when the project was poised to succeed, China flooded the market with REEs just long enough to knock Molycorp out of the market. After its Chapter 11 bankruptcy reorganization, Beijing is allowing Molycorp to continue operations in China. But once again, the U.S. has no domestic REE production.
This anti-competitive behavior in a domestic company would earn an investigation by the Federal Trade Commission (FTC). In the international economy, the American government’s options were more limited. The Obama administration, joined by Japan and the European Union, filed a complaint against China in the Dispute Settlement Body of the World Trade Organization (WTO).
America won its case, but the Molycorp mine in California was still bankrupt. In 2017, the rare-earth mining assets were sold to a consortium of buyers that includes Shenghe Resources Holding Company, a Chinese firm with ties to the PRC’s government, according to mining executives quoted in IndustryWeek. The Chinese government broke the rules of the WTO and still came out on top.
The rare earths industry is one of the more egregious instances of a non-market economy manipulating the markets, but it is far from the only one. The problem began when the free nations of the world agreed to admit China into the WTO in the first place. The WTO grew out of the General Agreement on Tariffs and Trade, a post-World War II attempt to rationalize trade and reduce barriers to it. As far as it concerned trade between developed nations recognizing the rule of law, it was a great success.
China joined the WTO in 2001. The organization’s press release from that day is full of hopes for expansion of “its rules-based system” that, in retrospect, look naive. “As a result of the negotiations,” the press release reads, “China has agreed to undertake a series of important commitments to open and liberalize its regime in order to better integrate in the world economy and offer a more predictable environment for trade and foreign investment in accordance with WTO rules.”
The specific promises are even less believable 18 years later:
China will provide non-discriminatory treatment to all WTO Members…many of the restrictions that foreign companies have at present in China will be eliminated or considerably eased after a 3-year phase-out period. In other areas, like the protection of intellectual property rights, China will implement the TRIPS (Trade-related Aspects of Intellectual Property Rights) Agreement in full from the date of accession.
Many of these changes have been made in Chinese law, but in a communist country, the law matters less than the will of those enforcing it. Intellectual property rights of foreign nations are routinely ignored, and counterfeits from China are sold around the world with the tacit acceptance of their government.
China also ignores environmental and occupational safety laws while banning independent trade unions from organizing. In a country that respects the rule of law, these things have been judged to make the marketplace more humane. They also make it more expensive to do business, but most people accept that tradeoff. China routinely ignores what laws it does have and squashes any independent source of power like trade unions or industry groups that might challenge the state to change.
China’s accession to the WTO came with the expectation that China would be a “market economy” before very long. These actions show that it has not, and has no intention of ever doing so. Even so, we continue to trade with China on unfavorable terms, a reflection of the consensus among bipartisan elites that free trade benefits everyone, with little or no tradeoffs. The rare earths dispute shows how untrue that is.
Conservatives have recently been transfixed by a dispute between Sohrab Ahmari and David French over whether the liberal democratic system will allow social conservatism to co-exist with the values of the secular left when the secular left increasingly refuses to play by liberal democracy’s rules. A similar argument needs to be had about free market competition with non-market economies that are just as lawless in their pursuit of victory. Conservatives have long fought for greater market efficiencies, but we must now ask ourselves if that goal is worth the price.
Free traders have been very pleased to divide the debate between two sides: those who want to trade with the world, and those who want to keep out all foreign goods. It is a false dichotomy between absolutes. In between, there are many who would be happy with trade, provided it were among free nations. In a system where all involved can be trusted to obey the rules, and where violations can be punished with more than a slap on the wrist, trade can improve all nations’ prosperity.
But a game where only one side plays by the rules is—and there is no other way to say this—rigged. Competition among equal parties is fair and free. If a factory in one state loses out to another, so long as no government’s thumb is on the scale, the result is just. Everyone follows the rules. May the best company, and the best workers, win.
Compare that to competition with an unfree country’s manufacturers. Is a factory in China polluting in violation of their laws? We have no way of knowing. Even if we did, there is little we can do about it when their court system serves only the will of the Chinese Communist Party.
Are their factories working cheaper because they are unsafe? Likely, but again there is no justice system that will remedy it. There are no independent unions to fight for work rules that protect people’s health, nor for increased wages like those in the developed world. China pretends to be a worker’s paradise, but in reality, it is a billion-member factory town.
This month in The Atlantic, Reihan Salam argued normalizing trade with China was a mistake from the beginning. Salam dates the problem to a year before China’s WTO accession, when Congress extended “permanent normal trade relations” (PNTR) to China, rather than annually renewing most-favored-nation status. The results were stark:
The annual battles over whether or not China merited MFN status naturally brought human rights issues to the fore, and gave voice to champions of the Tibetans and other marginalized, and sometimes brutalized, minorities. The deepening of economic ties that followed PNTR had the opposite effect—rather than draw attention to all the reasons the U.S. might want to be wary of further entanglement with China, it greatly enriched those who profited from that entanglement.
We have now locked ourselves in an embrace with a corrupt regime, and it has not been to our benefit economically or morally. The rare earths trade has been one of the worst examples of how Red China has used our openness against us, but it is far from the only one. Now, bound to a hostile nation that grows in power every day, we have outsourced so much of our economic machinery to them that business leaders are heard to say that reshoring manufacturing is “impossible.”
It is not impossible, but it requires hard work. Congress—yes, Congress—must reassess the ease with which unfree nations are granted access to American markets. The entire international trade structure of the WTO has become an unequal treaty, with the United States and the rest of the developed world on the losing end.
China is familiar with the concept. Its trade with the Western world was once starkly unfair in the other direction. More powerful nations, including the United States, forced China to sign unequal treaties beginning in the 1840s. What came next was a “century of humiliation,” followed by the isolation caused by the communists’ victory in their revolution in 1949.
Our politicians may be ignorant of history, but China’s are not. American surrender on trade could cause our own century of humiliation. To avoid it, our leaders must, at last, ask the question workers across the country have asked for 20 years: has unrestricted, one-sided, free trade with China really benefited the average American community? Has ceding control of strategic resources to the enemy made us safer as a nation? After two decades of humiliation, the answer is clear.
A week and half after President Trump and Chinese President Xi Jinping met to smooth over trade disputes, China announced it will buy more foreign goods , including U.S. soybeans. At the same time, it vowed to completely retool its “Made In China 2025” program, intended to make China the world’s most powerful economy. Nice gestures, but whether China follows through is a big question.
Reuters reports that Chinese state-owned firms snapped up more than half a million tons of U.S. soybeans on Wednesday to show they mean business. But the Made In China 2025 reversal, if sincere, is even more significant. It would mark a major shift in China’s guiding economic philosophy, a strange melding of top-down communist political control with free-market tenets.
“The revised plan would play down China’s bid to dominate manufacturing and be more open to participation by foreign companies,” The Wall Street Journal reported, citing “people briefed on the matter” as the source. Continue reading
Later this week, President Trump and Chinese President Xi Jinping are expected to convene for discussions on a variety of contentious economic matters. While previous talks on tariffs, intellectual property theft, and cyber security have been disappointing, Saturday’s meeting in Buenos Aires presents a clear opportunity for breakthroughs.
Although much of trade negotiations are fraught with roadblocks and challenges, the issues of international shipping through the Universal Postal Union are far more straightforward. As the Trump Administration has pointed out, American enterprises and small businesses have suffered from an obvious one-side imbalance due to the UPU pricing treaty. The majorly reduced rates from the U.S. Postal Service have allowed businesses from China to drastically undercut U.S. companies on shipping costs.
In October, Frontiers of Freedom president George Landrith praised President Trump’s decision to withdraw the U.S. from the UPU, adding, “Chinese businesses should pay the reasonable price of their shipping. It is not right that the American taxpayer and postal rate payers have been forced to subsidize them.”
The current below-cost international rates have added to the Postal Service’s beleaguered financial position, producing losses of $410 million since 2015. Thankfully, the administration is now poised to adopt pricing changes that are financial sustainable while also creating a level playing field for domestic shippers.
By Jack Crowe • National Review
President Trump announced during a Wednesday press conference that his meeting with European officials yielded key trade concessions, including an increase in American soybean and liquefied natural gas (LNG) exports to Europe, and a commitment to work toward eliminating non-auto tariffs entirely.
“We have agreed today to work toward zero tariffs, zero tariff barriers and zero subsidies on non-auto industrial goods,” Trump said, reciting a joint statement crafted with European Commission president Jean-Claude Juncker. “We will also work to reduce barriers and increase trade in services, chemicals, pharmaceuticals, medical products, as well as soybeans. The European Union is going to start almost immediately to but a lot of soybeans, they’re a tremendous market, to buy a lot of soybeans from our famers in the midwest primarily.”
“The European Union wants to import more liquefied natural gas from the United States and they’re going to be a very big buyer. We’re going to make it much easier for them but they will be massive buyers, so that they will be able to diversify their energy supply,” he added.
by Stephen Moore • Investor’s Business Daily
Is it possible that Donald Trump is winning on trade?
Last week, Trump apparently delivered two underappreciated victories as a result of his threat of stiff tariffs and renegotiated trade deals.
First, Seoul has agreed to reduce long-standing non-tariff trade barriers that have reduced American exports to Korea. Though the details are still sketchy, the Koreans have agreed to buy more Ford and General Motors Co. cars and trucks and other U.S.-made products. This can only be good news for American workers. The Koreans have also agreed to increase reimbursement rates to American drug and vaccine producers.
Even The New York Times grudgingly conceded that the deal “represents the type of one-on-one agreement that Mr. Trump says makes the best sense for American companies and workers.”
Also in recent days, China appeared to stand down in response to Trump’s jarring announcement of a record $50 billion of tariffs on Chinese products. Premier Li Keqiang pledged to improve American companies’ access to Chinese markets. He also said in a news conference that China would treat foreign and domestic firms equally. And what’s more, Beijing has promised that it would stop forcing foreign firms to transfer technology to China and would strengthen intellectual property rights enforcement. That was a smart and encouraging response. Continue reading
By Dan McLaughlin • National Review
The Republican tax plan has a lot of moving parts, but its centerpiece is a major long-term cut in corporate taxes. American businesses have been eagerly anticipating these cuts, and 2017’s strong stock performances were driven in part by an expectation in the market that they were coming. Liberal critics are apt to downplay the impact that corporate tax rates have on the competitiveness of American business — but the news from around the globe suggests that our economic competitors are very aware of the threat that the “Trump tax cuts” will lure more business back to the United States, or stem the departures of existing businesses, unless they take steps to keep up.
China: The Chinese government may not share America’s view of how to stay competitive, but it recognizes that the Republican plan improves America’s position. From the Wall Street Journal:
In the Beijing leadership compound of Zhongnanhai, officials are putting in place a contingency plan to combat consequences for China of U.S. tax changes as well as expected interest-rate increases by the Federal Reserve, according to people with knowledge of the matter. What they fear is a double whammy sapping money out of China by making the U.S. a more attractive place to invest.
As President Trump takes aim at some of his key campaign promises, the discussions around the potential renegotiation of the North American Free Trade Agreement (NAFTA) have further emerged. From the president’s view, concerns persist about the nation’s propensity to import more goods that we export to a number of large economies – thus creating trade deficits.
On this subject, many economists have theorized that trade deficits are not a measure of what the United States owes another country, and that there can be numerous benefits to running them. However, in actuality, it would be worthwhile for the administration to address a different type of trade deficit that has long plagued American consumers and taxpayers.
Specifically, it is the deficit that the U.S. Postal Service has amassed as result of delivering packages and mail from abroad. Continue reading