Ties That Blind

May 1, 2007 • Commentary
This article appeared in South China Morning Post online on May 1, 2007.

A crescendo of voices on Capitol Hill is calling for retaliation against China for “cheating” on its trade commitments and for undervaluing its currency. Senator Byron Dorgan, a Democrat from North Dakota, has even introduced a bill to end normal trading relations with China. The presumption is China must be “cheating” — and doing so at the expense of US jobs — because the American bilateral trade deficit with China continues to reach new highs. To “level the playing field” and correct the trade imbalance, which reached US$233 billion last year, Congress must retaliate with protectionist measures.

False logic underlies this vision of US‐​China trade. Trade is too often seen as a zero‐​sum game — one party wins; the other loses — with the prize being a trade surplus. That mercantilist attitude, which David Hume in 1758 called “a narrow and malignant opinion”, accounts for a large amount of the China‐​bashing in Washington today. By focusing on producers who may have been harmed by trade rather than on consumers who benefit, Congress commits the same fallacy of composition that Hume exposed. Moreover, by failing to recognise the widespread benefits of trade for all nations, protectionists have lost sight of the liberal idea best expressed by Hume that “where an open communication is preserved among nations, it is impossible but the domestic industry of every one must receive an increase from the improvements of the others”.

If China had not unilaterally liberalised its state‐​controlled trading regime after 1978, both China and the global economy would surely be much worse off today. Likewise, if the US is overly zealous in restricting Chinese goods imports, the long‐​term impact will be to lower the growth of US exports to China and a reduction in the wealth of both nations.

What Congress needs to be told is: free trade is mutually beneficial — consumers gain regardless of why imports are cheap; the purpose of trade is not to create jobs but to create wealth; and that the balance of payments must always balance because of double‐​entry bookkeeping — a current account deficit must be offset by a capital account surplus.

All the protectionist hyperbole diverts attention from the significant progress China has made in its transition from a planned to a market economy, the increase in economic and personal freedom the Chinese have acquired, and the enormous benefits to consumers from the availability of cheap Chinese imports.

The truth is that no one is forced to trade with China. As Minister of Commerce Bo Xilai noted in responding to US protectionist threats: “If they [American businesses] could not make money doing business with China, they would not have been doing it.”

Daniel Griswold, director of the Cato Institute’s Centre for Trade Policy Studies, estimates that annual net job losses in the US due to imports from China “account for only about 1 per cent of overall job displacement”. Yet industries that feel the pain of those losses will find it expedient to lobby for protection at the expense of American consumers.

The US policy of engagement has worked relatively well, as has China’s policy of “peaceful development”. It will take time for China to meet all its World Trade Organisation obligations. There has been much progress on market access and rules‐​based issues, but much remains to be done on enforcing intellectual property rights.

To cheat requires intentionally breaking agreements one has made in good faith. China has never agreed to float its currency, but is moving in that direction. Yet Democrat Senator Charles Schumer and Republican Senator Lindsey Graham have repeatedly threatened to impose punitive tariffs on Chinese imports unless the yuan is allowed to appreciate significantly against the US dollar.

Even though US Treasury Secretary Henry Paulson has initiated a strategic economic dialogue to promote engagement, he feels that he needs to instruct China on what is in its best interest, with an implicit threat of retaliation if Beijing moves too slowly. In recent testimony before the Committee on Banking, Housing, and Urban Affairs, Mr Paulson stated: “China must live up to its WTO commitments. It must protect and vigorously enforce intellectual property rights. It must increasingly open its markets to foreign competition — for its own good as well as for ours. And it must introduce greater transparency in regulation and observe the rule of law.”

The need to preserve “an open communication” among all nations is still of vital importance. When Mr Paulson meets Vice‐​Premier Wu Yi and the Chinese delegation later this month in Washington for the next round of the strategic economic dialogue, he should emphasise the basic principle of unilateral free trade that Hume understood and that has made Hong Kong rich.

About the Author
James A. Dorn

Vice President for Monetary Studies, Senior Fellow, and Editor of Cato Journal