“We don’t win anymore,” said candidate Donald Trump numerous times during his 2016 presidential campaign, referring to America’s trade relationship with other countries. Trump and tens of millions of his supporters hold the protectionist view that trade, like all human relationships, is a war that must be “won.” Rather than exchanges that leave both parties better off, protectionists see trade as a zero-sum game in which one side benefits at the other’s expense.
Fair Trade Over Free Trade
The president has said on more than one occasion that he supports free trade, but he insists it must be fair, meaning that China or other partners reciprocate any relief from tariffs and other burdens placed on their exports. And it is true that China has not treated American exports to China the way America has treated Chinese exports to America.
China has been more protectionist and is likely engaging in some subsidization and/or other government assistance to its exporters, even if it and its effect on America’s trade deficit with China are greatly exaggerated. Americans would be better off with zero tariffs and completely free trade regarding its imports.Regardless, Trump and his supporters draw completely the wrong conclusion. Persuading Xi Jinping to adopt free trade policies would make China’s economy stronger, not weaker.
There has been a lot of ink spilled, including by this writer, about the negative effects Trump’s trade policies have on Americans. Yes, if China were to reduce all its tariffs to zero and throw open its markets completely to international trade, Americans would be better off. But even if China continues its high tariffs and other interventions, Americans would still be better off with zero tariffs and completely free trade regarding its imports.
China Is Only Hurting Themselves
As Walter Williams put it, if you’re out in a rowboat with someone who shoots a hole in his end of the boat, you’re not helping yourself by shooting another hole in your end.
Well, the same goes for the Chinese. To the extent they are doing the things they are accused of by Washington, they are only hurting themselves. All the arguments for why the US should eliminate its tariffs, even if the Chinese don’t, also apply to China. Whatever money China spends subsidizing its exporters is money that could have been used by a Chinese industry that doesn’t need to be subsidized. Every additional renminbi yuan Chinese consumers are paying for automobiles or other products upon which they place high tariffs is one they no longer have to spend on something else, making the Chinese poorer for all the same reasons US tariffs make Americans poorer.
Contrary to the flawed reasoning pervading most of the political spectrum, China’s economy is not growing faster than America’s because of its protectionism and other government interventions. It’s growing faster despite them.
US manufacturing output hasn’t dropped significantly as the jobs have left.
China has a population north of 1.4 billion people. If the whole world were laissez-faire, China would have the largest economy in the world. It has been the relative freedom of the US economy compared to China’s that has made the US economy larger. It is only the persistence of relatively more state interventions, even in the post-communist era, that has kept China from becoming the largest economy already.
For labor-intensive manufacturing, China has a huge comparative advantage over the United States. Not only does it have a labor force whose standard of living was kept artificially low for decades under communism, but its sheer size also tends to drive labor costs lower due to simple supply and demand relationships. If China’s economy were somehow transformed instantly to laissez-faire tomorrow, even more manufacturing jobs would move there, not fewer.
If this seems foreboding, it’s not. Let’s not forget that US manufacturing output hasn’t dropped significantly as the jobs have left. Most US manufacturing jobs have been lost to automation, while manufacturing output has remained high. This makes perfect economic sense in a country that has a much smaller labor force than China’s—the labor-intensive manufacturing moves there, while the automated manufacturing develops here.
How Big of a Threat Is China's Economy?
It’s not just manufacturing jobs moving to China that inspires unwarranted fear in this country. Americans also seem to fear the prospect of China’s economy becoming larger overall. But that isn’t a threatening proposition. The only way it could occur is if China continued to liberalize its economy, which is a good thing for both Americans and the Chinese. In any case, the well-being of the citizens in any country stems from per capita income and wealth, not overall size.
Some may argue that China becoming the world’s largest economy would also make it the strongest country militarily, but that, too, is an unwarranted fear. Every nation in the world besides the United States has an economy smaller than China’s. None of their citizens have found themselves “speaking Chinese.” China seems far more interested in foreign investment than conquest, which would be an impossible proposition against a nuclear power.
Economically independent people don’t brook tyranny the way destitute subjects do. See 1776.
So far, the Chinese government has been successful in introducing enough economic freedom to attain growth without surrendering too much political freedom to its citizens, but that cannot go on forever. The more affluent its citizens become, the more they will demand that political freedom. Economically independent people don’t brook tyranny the way destitute subjects do. See 1776.
There is a lot more wrong with China’s economy than trade restrictions. There are still too many state-owned enterprises, and there is too much intervention. They’ve also emulated our own predilection for cheap money and credit. But Trump achieving his stated goal of persuading the Chinese to drop some or all trade restrictions would make the Chinese economy freer and therefore stronger, all other things being equal, accelerating its progress towards becoming the largest economy in the world. And that would be just fine.