When I got to my hotel room in Shanghai I fired up the laptop to visit Facebook and Twitter and let everyone know I was here. Facebook and Twitter did not load. I tried to Google and was redirected to Google Hong Kong. I realized that the government was watching, and manipulating, the information I was able to receive in my hotel room. That was my first reminder that China's form of government has a substantial dark side. In general, China in person proved to be much less exciting and much more depressing than I had hoped. I have been thinking a great deal about our relations with China since then and have come to some conclusions below.
Over the past twenty years, the consensus view was that we should trade with oppressive states such as China because trade would help them down the path toward economic and political freedom. In the end, the political systems of all countries (more or less), would come to resemble western free market democracies and we would achieve a prosperous global peace. Richard Pipes postulated a direct connection between economic freedom and political freedom in Property and Freedom. Francis Fukuyama foretold global progress toward a universal acceptance of capitalist liberal democracy in The End of History and the Last Man. We enthusiastically embraced trade with China on these theories.
Our trade deficit with China has ballooned from $2 billion in 1989 to $250 billion in 2009. In that space of time, China rose to become the second largest national economy in the world. For perspective, our deficit with Japan was $45 billion in 2009 and was ~$88 billion pre-recession (it has been above $50 billion per year for 20 years). Our deficit with South Korea was $20 billion in 2009. (Trade data here.) So we are borrowing $250 billion per year to support the Chinese economy. China has been almost humorously unsubtle in devising the unfair and self-interested policies that govern foreign businesses in China.
We have accepted trade deficits with partners to help them grow. We wanted Japan to thrive after World War II so we supported it. We wanted South Korea to be a shining example in Asia of the virtues of capitalist liberal democracy so we have accepted trade deficits with them. We do this from time to time to effect change in the world. In the cases of Japan and South Korea, their economies were small enough that the US economy could tolerate a deficit with them without suffering undue stress.
Economists have varied opinions about the impact of trade deficits, but it cannot be denied that in the broad sweep of history every country with substantial trade surpluses (Japan, Korea, Germany, the United States before 1970) has gotten stronger and more prosperous while countries with substantial deficits have not. So perhaps despite theoretical debate we can say that, for practical purposes, the proof is in the pudding.
The size of our trade deficit with China is unprecedented. Because it is unprecedented, its effects are hard to predict. Economists and economic observers offer conflicting assessments of our deficit with China and our trade deficit in general. Some say that trade deficits drive growth. Almost all agree that trade deficits create currency insecurity. Some, including Andy Grove, say that deficits, by exporting jobs that would once have been held by America’s middle class, change America’s basic class structure, enriching the elite and undermining the middle class (here), and will ultimately stifle America’s ability to continue to innovate (here). There is a good overview by Tim Duy here of these lines of reasoning. These are not AFL-CIO representatives who are self-interestedly seeking wage protection for their union members. These are intelligent, disinterested American observers and they have become “free trade heretics.”
It is hard to avoid the conclusion that the heretics are right: working within China’s mercantilist trade scheme – which requires not only a massive flow of capital to them but also a massive flow of technical know-how to them -- may be a horrible strategic error with significant negative implications for our basic social structure in the United States as well as on our ultimate ability to remain globally competitive. The theories that led us to trade with China in the first place were, it appears, sadly mistaken. The clash of civilizations theory of Samuel Huntington appears, in the end, to have been closer to the mark. Instead of capitalism influencing nations, nations appear to have inherent cultural predilections that do not change, whether they are heavily engaged with international business or not. International business can make them a wealthier version of whatever they were before, but it does not appear to change them otherwise. Certainly it does not appear to be changing China with respect to political freedoms.
At the very least, we can conclude that open trade (one way open trade) with China is economically risky.
In addition to the economic issues though, there is an ethical issue here. China controls the information available to and the basic freedoms of its workers, it oppresses its workers and by trading with China we help the governing regime do that. The government controls its currency, preventing currency markets from correcting trade imbalances. The average new college graduate in China makes 2,000 yuan per month. That’s about $300. Factory workers make less than $200 per month. These people are very poor and, despite some limited signs that they are starting to speak out and strike for higher wages (but primarily against foreign companies), they have very limited political freedom. At the same time, there is a Ferrari dealership in Shanghai. The Chinese elite are getting rich. The Chinese elite make their millions off the sweat of the Chinese people. And then they control what those people think, what they say, what they can see and what they make. By refusing to increase the value of the Yuan, China keeps its workers’ wages low (measured on an international scale), keeping the elite in business.
When does labor become slave labor? If we do not believe that trading with a country tends to make that country more free, when is a country so oppressive that we should not trade with them? Especially when that trade makes the regime more secure and creates risks for our economy? Should we trade with countries that keep millions of workers in conditions of poverty, oppression and ignorance? How oppressive does a regime have to be for trade to be ethically wrong and politically counter-productive? What we have in China is a massive population enslaved by an elite that keeps them in ignorance and keeps their wages low. What should we do now that Plan A hasn’t worked?
I believe we need to explore putting China on a trade balance program where we adopt a trading scheme designed explicitly to yield a balanced trade relationship that does not allow uncompensated technology transfer from the US to China. Our goal should be to achieve a balanced trade relationship within 5 years.
My second choice would be to declare defeat in our quest to influence China and withdraw from China trade altogether. It would be an economic shock but we were affluent before trading with China. We can be affluent again without someone sucking all of our capital and technology out of our country.
When we look back on this period economically, strategically and ethically I believe we will conclude we should have acted sooner.
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