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World Trade: The Special Case of China

While free trade with all nations is the avowed goal of both free traders (as my colleague Ryan Young and I outline in our new study, “Traders of the Lost Ark”) and the current administration, it has to be acknowledged that China is a special case. China has repeatedly been a bad actor in trade, breaking international trading norms in several respects. Something has to be done—but what?

China’s actions include, but are not limited to:

Some of these are more important than others. As we say in our paper, so-called “currency manipulation” in fact amounts to a subsidy by the Chinese government to American consumers (and indeed, the U.S. can be credibly accused of practices that amount to the same thing), as does its state aid in respect of exports to the U.S. However, state aid within China acts as another form of restricting market access.

The current administration’s initial policy towards China did look as if it was well-targeted at China’s predatory practices. As AEI’s Derek Scissors points out, the initial goal of the first round of tariffs on Chinese companies last year was aimed at the specific violators of intellectual property rights. However, after the almost-collapse of Chinese mobile phone manufacturer ZTE, the President switched direction.

Current and threatened tariffs seem much less targeted. Indeed, as the Heritage Foundation’s Riley Walters says, “[C]urrent U.S. policies toward China seem more like American industrial policy than an attempt to reform China.” As the costs of the tariff war escalate and neither side shows any signs of backing down, Walters also points out that:

Instead of taking an approach that commits to conservative principles aligned with free trade, rule of law, and a limited government, the White House has committed to an approach more characteristic of Beijing—the use of economic leverage as a means of coercion.

This has been a mistake. There is, however, another suite of policies that the White House could follow. They include:

  • Work with allies to rebuild the World Trade Organization and use its procedures to hold China to account. As we say in our paper, the WTO’s dispute resolution process has generally worked well. Tariffs are an end-point in that process rather than a beginning. This would require rebuilding relations with allies that have been strained by the administration’s trade policies, presenting a united front, and solving some of the problems that have made the WTO less effective in recent years (we will have a subsequent post on that issue). In particular, the U.S. should work to remove China’s WTO status as a developing country, which allows it to maintain its barriers to investment. America should also take the lead in developing WTO rules restricting the scope of State Owned Enterprises.
  • Work towards reaching an agreement with China whereby it would remove its barriers to investment and reduce its non-tariff requirements on foreign firms, in particular any references in charters to the Chinese Communist Party.
  • Help to create new global trade alliances based around principles of economic liberty that will provide an attractive counter-option to China’s Belt and Road and other initiatives.
  • Deploy carefully targeted tariffs against intellectual property abusers who pose genuine threats to national security. As noted above, this was the initial intent of the first round of tariffs and is an appropriate use of the national security provisions in trade law. The administration must be careful to avoid this becoming the first step on a slippery slope back to more general tariffs, which will encourage rather than deter intellectual property abusers.

A combination of carrot and stick might well work better than the current stick-only approach (especially as the stick is also beating American businesses and consumers).

However, the fundamental problem with China’s current approach is one that cannot be solved with trade policy alone. China is receding from the more entrepreneurial state it was in the 1990s and early 2000s back into a neo-Maoist dictatorship. In that respect, America must once again be the shining city on a hill, a beacon of liberty to the rest of the world. Anything less will prevent any meaningful chance of reform in China.