Rethinking Trade With China
Updated: Mar 15, 2020
One of President Trump’s primary election issues was to fix our broken trade relationship with China. There is some speculation that a trade deal could be signed as soon as the end of May but pundits have criticized the tactics used to bring China to the trading table, namely the billions of dollars worth of tariffs placed on Chinese goods. Free trade champions frown on tariffs, subsidies, and import/export quotas as market distortions that raise the cost for both consumers and producers. Free trade advocates correctly point out that globalization and the lowering of trade barriers have reduced people living under the global poverty line from 35% to 10% as well as raising the income of the bottom 40% of the global population 50%. On an aggregate scale, there is no doubt free trade has bettered humanity and lifted billions out of misery and starvation.
The idea behind free trade is that the countries engaging in trade are relatively free-market economies that don’t have massive government interference in the economy. Free-markets allow capital to flow freely, innovative products and services to be produced, and lower prices for consumers through competition and market efficiency.
However, China represents the very antithesis of a free-market economy. According to the Heritage Foundation’s annual economic freedom index, China ranks 100 out of 193 countries with noticeably low marks for property rights and business freedom. Since 2001, when China joined the World Trade Organization (WTO), government subsidies have financed over 20% of the expansion of manufacturing capacity within the country. Massive subsidization of particular industries has led to excess capacities of certain goods, like steel and aluminum, on the global market. American companies aren’t competing in free trade conditions anymore, they are going to go out of business because a Chinese company is producing more of a good at a detrimentally lower price not determined by market conditions and the difference is being made up by government subsidies. Furthermore, environmental regulations in the United States, which attempt to account for market externalities like pollution, create added costs for firms so they can meet those standards. It is because of environmental consciousness that the United States is ranked 27 out of 193 countries on the Environmental Performance Index while China is ranked an abysmal 120. One reason why is because roughly 63% of groundwater in China is categorized as “bad to very bad” due to agricultural and coal pollution.
The problem here is that not only does China have a relaxed stance toward environmental protection, but that the country is making no effort at all to catch up to Western countries who are pushing to keep the environment clean at the cost of profit margins for their firms. China doesn’t share this same line of thinking and to the detriment of millions of its citizens, gains an economic advantage from what is severe environmental negligence.
One of the major sticking points in the upcoming trade deal has been forced technology transfers and intellectual property theft which costs the United States between $225 and $600 billion dollars annually according to the office of the US Trade Representative. Corporate espionage, in this case, the recruitment of employees who are Chinese nationals to sell trade secrets from within the company, has allowed Chinese firms to overtake American firms without having to innovate or develop new products and services. This is not only an uneven economic playing field but rampant and widespread criminal activity that defines a large part of the United States’ trade relationship with China. The ramifications of IP theft extend beyond creating an unfair economic playing field. China’s new stealth fighter, the J-20, closely resembles the F-22 produced by Lockheed Martin which of course makes sense since the technology was stolen during a cyber attack. In 2014, a Chinese national was indicted by a federal grand jury for stealing trade secrets from Boeing which produces the C-17 military transport aircraft. All of this makes clear that China is a bad geopolitical and economic actor. Their aggressive behavior is costing American companies and putting national security at risk.
President Trump is right to take China to task and fight back against the economic warfare they have conducted in our trade relationship. The degree to which they have stolen intellectual property ignored massive environmental concerns and subsidized domestic industries call for accountability and forcible action. Free traders shouldn’t criticize President Trump and his use of tariffs as a long-standing, protectionist policy. If they really want free trade, free trade advocates need to understand that we aren’t dealing with a free-market economy. Instead, we are dealing with a jingoistic, state-run system. Tariffs are a weapon to bring China to the table and enforce a potential deal that aims to correct years of abuse and negligence.
It’s time to rethink our trade relationship with China and so far, President Trump has taken the appropriate measures to set it right.