Have you been to Seoul? Have you been to China? If you are a free trade absolutist, you should certainly go there and check it out. Go to an electronics store. Try to find car dealerships. You may come back with a different perspective on what we call “free trade.” Just as one example, when I was last in Seoul I went to the biggest electronics store, it’s really more like a mall, in the city, called Yongsan. The salient fact about Yongsan was that the first two floors were reserved for Korean products only. To find the American (or Japanese) electronics, you had to go upstairs and find the special store. Unbelievable. They’re not doing that for customers’ sakes. They’re not doing that to make themselves more money. The only possible reason a retail store would do that is because the government told them too. That’s just the beginning.
The situation is that we are engaged in one way free trade where Asian countries can export anything they want to us and we can export a token amount to them. They wind up with lots of money and we wind up with lots of debt. Good deal? Bodes well? I’m not so sure.
How did we get here? Three factors.
- First, economic textbooks indicate that if two countries have free trade they can each do what they are good at and everyone will wind up better off. Example: France is good at making wine. England is good at making sweaters. The English and the French will both be better off if the French focus on making great wine, the English focus on making great sweaters and they trade back and forth. Everyone will have both great sweaters and great wine! Makes sense.
- The second factor is that for some time we have managed our trade policy toward Asia to be a sort of Marshall Plan for Asia. It was important to us that Japan prosper after World War II. It was important to us that South Korea, which was basically agricultural prior to the Korean War (the industrial center was in the North), prosper. More recently, we were very eager to see China prosper on the theory that prosperity would make them more like us and make them like us more.
- The third factor is that Americans want to play fair. We don’t want to cheat. We have in fact an abiding sense of guilt toward poor foreigners and we don’t want to exploit them because, after all, we are so rich. Well, on this score, friends, I can tell you right now that we should get over it. These guys are plenty rich and they have no interest in being fair. They are interested in being rich and their politics and policies are appropriately attuned to that objective. They are playing to win. We are playing to play, or perhaps even playing to lose.
The economic theory makes a lot of sense on paper. However, reality is more complicated and the correct response to the theory is not to be a free trade absolutist. There are many prosperous countries that do not have free trade, including our Asian partners and our European partners. In fact the Asian protectionist, or mercantilist, economies seem to have become much wealthier while they have closed domestic markets. Obviously Smoot-Hawley or no Smoot-Hawley, managed trade obviously can succeed.
In the early 50’s our Marshall Plan policy made a lot of sense. Japan’s GNP in 1951 was 4.3% of the US economy, comparable to the Netherlands or Argentina today. It was reasonable to suppose that the great American economy could tolerate a few small one sided trade relationships for the sake of international stability. Well today things are different and these huge inflows of foreign goods are getting stuck in our craw. It is too much to continue.
Today’s huge trade imbalances of hundreds of billions of dollars per year are an order of magnitude bigger than they were ten years ago. It is creating unpredictable volatility in our currency and economy and it is unsustainable. It is upsetting US industries and workers in ways that, if they were part of the normal vicissitudes of international markets, might be tolerable but as part of a deliberate international strategy are not tolerable.
Now China is restricting contracts with the Chinese government to companies with “indigenous innovation, which means that the intellectual property behind products or services they are buying must be owned by Chinese companies. This is an $85 billion market China just closed off from US competition. As Rick Larsen (D-WA), co-chairman of the US-China Working Group recently said: “”When it comes to protectionism, we’re minor league players when you look at what China is doing.” (Good article here.)
A more longstanding and fundamental problem with our Asian trade relationships concerns intellectual property. This is an area where the United States makes big money internationally -- software, movies, games and technology -- and it is increasingly the focus of our economy. Piracy is rampant in Korea dn China. And coincidentally, this is one aspect of life in China that the Chinese government despite its firm control over so many aspects of life in China can do nothing about. Copying of US software of all kinds in China and Korea is rampant and it benefits those governments to keep it so. Aside from failing to protect against piracy, Korea and China explicitly regulate and limit the distribution of US movies in their countries.
A Microsoft CEO Steve Balmer recently said on CNBC, “Intellectual property protection in China is very, very bad -- abysmal. It’s almost not fair. We’re buying a lot of goods from China but the things that US companies can sell -- pharmaceutical products, media software -- …is not getting paid for in China.” It’s almost not fair??
This is working well for China and Korea in particular. China is getting rich. They are building their cities. Korea is using its protected home markets to build up manufacturers like Hyundai and Samsung so they can take on international markets. Our Marshall Plan has worked in one respect -- our Asian trading partners are rich now -- but it is worth mentioning that it has not worked in another respect. It has not made them more like us. Specifically China has not become more democratic because they have engaged in international trade and more of their citizens have become affluent.
We have to discontinue our Marshall Plan policies toward Asia and demand policies that create balanced and sustainable trade relationships. This should be the policy of the Republican Party.
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