When Treasury Secretary Henry M. Paulson meets this week with China's vice premier Wu Yi to conduct the second round of the Strategic Economic Dialogue, he should continue to emphasize the mutual gains from free trade and not succumb to the mercantilist attitude that seems to be prevalent on Capitol Hill.
Too many politicians view trade with China as a zero-sum game: China wins by running a trade surplus; America loses by running trade deficit. A crescendo of voices on Capitol Hill is calling for retaliation against China for "cheating" on its trade commitments and for undervaluing its currency. Sen. Byron Dorgan, a Democrat from North Dakota, has even introduced a bill to end normal trade relations with China.
The presumption that China is "cheating" — and doing so at the expense of U.S. jobs — is strengthening as the U.S. bilateral trade deficit with the PRC continues to reach new highs. Pressures are growing for Congress to "level the playing field" and correct the trade imbalance, which reached $233 billion last year.
The danger is that mounting pressure will lead to unwise protectionist legislation that could impede U.S.-China trade and harm the global economy. China is the fastest growing market for U.S. exports, and a key aspect of SED II will be to make sure U.S.-China trade relations stay on a steady course of long-run engagement.
The false logic of mercantilism is enticing but dangerous. As David Hume pointed out in 1758, the idea that a trade deficit is bad and a surplus good is "a narrow and malignant opinion." Undue attention to the bilateral trade deficit with China accounts for a large amount of the China-bashing going on 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 recognize 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 liberalized its state-controlled trading regime after 1978, both China and the global economy would surely be much worse off today. Likewise, if the United States is overly zealous in restricting the importation of Chinese goods, the long-run impact will be to lower the growth of U.S. exports to China and reduce the wealth of both nations.
What Congress needs to be told is (1) free trade is mutually beneficial — consumers gain regardless of why imports are cheap; (2) the purpose of trade is not to create jobs but to create wealth; (3) the balance of payments must always balance because of double-entry bookkeeping.
All the protectionist hyperbole diverts attention from those simple principles and ignores the significant progress China has made in its transition from plan to market. The Chinese people now have greater economic and personal freedom, and foreign trade has substantially increased the range of individual choices.
The simple truth is that no one is forced to trade with China. As Bo Xilai, the minister of commerce, noted in responding to U.S. 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 Cato's Center for Trade Policy Studies, estimates that annual net job losses in the United States due to imports from China "account for only about 1 percent 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 U.S. 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 WTO obligations. Much progress has been made on market access and rules-based issues, but much remains to be done on enforcing intellectual property rights.
The need to preserve "an open communication" among all nations is still of vital importance. When Secretary Paulson meets with Vice Premier Wu Yi and the Chinese trade delegation in Washington for the next round of the Strategic Economic Dialogue, he should emphasize the basic principles of unilateral free trade and not get entangled in the false logic of mercantilism.