Could America Act Like China?

(Photo: AP/Andy Wong)

Workers rest near a Chinese government billboard in Beijing on September 5, 2016.

With last week’s announcement of Robert Lighthizer his nominee to become the new U.S. trade representative, President-elect Donald Trump has completed the revolution he began when he appointed economist Peter Navarro as chairman of the newly created National Trade Council and Wilbur Ross as secretary of commerce.

None of these men come from the long-reigning economics and foreign policy establishment of the United States. They’ve all been in the trenches, and are realists rather than ideologues.

For those who’ve long sought a drastically different approach to trade, Lighthizer is probably as close to the perfect candidate as it is possible to get. As a deputy trade representative in the Reagan administration, he was involved in the negotiation of the myriad trade frictions that arose between Japan and the United States in the 1980s. The issues between the United States and Japan at that time were very similar to those that have subsequently arisen between the United States and Korea, and between the United States and China.

As a private attorney representing steel and other manufacturing industries, Lighthizer understands well the dynamics driving global trade frictions and imbalances. He understands that the global economy is presently structured to move production, jobs, and technology out of the United States, and that America’s major roles are those of buyer of last resort and borrower of first resort. He will undoubtedly strive to change the structure along with America’s assigned roles.

But what is “different” or “realist” really going to mean? The elite global media have been invoking dire scenarios of 1930s protectionism, trade wars, depression, and perhaps even shooting wars with the likes of China. Of course, these predictions are no more credible than those of the same elite with regard to who would win the presidential election. But in thinking about where U.S. trade and globalization policy is likely to go, it would be well to consider China’s position and practices.

China is a member of the World Trade Organization (by dint of America’s backing), and has concluded or is negotiating a number of bilateral and multilateral free trade agreements (FTAs). It speaks of opening further and more widely, and is often praised as a country that is on the crest of the free trade and globalization wave.

Indeed, in the wake of the recent failure of the United States to conclude the proposed Trans-Pacific Partnership, many commentators have voiced expectations that China will replace the United States in leading the world to fuller globalization. And China itself has voiced the readiness to do so.

Judging from media and think-tank commentary as well as scholarly papers and journal articles, China is widely depicted as a champion of free trade and a driver of ever-increasing global economic integration, based on extensive transnational flows of finance, technology, and goods and services. China is seldom the object of criticism for protectionist or mercantilist policies.

And why should there be criticism? After all, while its capitalism with Chinese characteristics has not followed the doctrines of Adam Smith, China has lifted millions out of poverty in just a few decades and continues to grow its GDP at about three to four times the U.S. growth rate. The new Trump nominees are certainly aware of this and it would be only natural for them to think in terms of what they might learn from China.

Consider the question of investment and location of production. Trump has already leaned on Carrier, Ford, GM, and Toyota to keep production and jobs in the United States. This has elicited loud cries of criticism from the U.S. economic and media establishment, but it is entirely in keeping with the Beijing model. Indeed, not only does China promote domestic production, but its standard practice has been to require foreign companies to produce in China and even to export from China as a condition of entry into the Chinese market.

Moreover, China reserves large markets for Chinese companies only. Just ask Facebook, Google, or Amazon about that. Nor is China a signatory of the World Trade Organization government procurement code, which opens the government contracts of signatory countries to foreign as well as domestic bidders. Like many countries, China has a value-added tax that is rebated on exports and imposed on imports. The effect of this on the United States is equivalent to that of a 20 percent to 40 percent tariff on U.S. exports to China.

In addition, China manages the exchange rate of its yuan to promote the government’s overall economic objectives rather than simply letting the value of the currency float and be determined by global market forces. Finally, China uses a mix of investment incentives (reduced taxes for ten years, free land, reduced rates for utilities, etc.) and subtle pressures to induce the offshoring of production and jobs from abroad to China.

Judging from the writings and statements of Trump and those he is appointing to high office, as well as the praise generally accorded to China for its economic and globalization program, the new administration will look carefully at how it might develop its own version of some of these policies. Perhaps the Committee on Foreign Investment in the United States (CFIUS) will take a harder look at the kinds and purposes of investment flows into the United States, especially the acquisition of existing U.S. companies by buyers from authoritarian countries guided by mercantilist principles. A system of taxing corporations on their cash flow from production and sales in the United States rather than on their overall income would be a way of responding to the impact of the value-added taxes of most other countries.

Exchange rates have been a problem ever since President Richard Nixon blew up the Bretton Woods system of fixed exchange rates in 1971. The new Trump team might take a two-track approach. The initial objective of the Bretton Woods system was roughly balanced trade for all participants over time. Since 1972, we have seen the evolution of a chronically unbalanced system with some countries like Germany, the Netherlands, Singapore, Japan, Korea, and China consistently running large surpluses and others such as the United States, the United Kingdom, Australia, and India running consistently large deficits.

On the one hand, the new Trump team might propose that the International Monetary Fund undertake to create a global monetary system that puts as much pressure on countries with chronic trade surpluses to reduce them as it does on deficit countries to achieve balanced trade—the original Bretton Woods objective of John Maynard Keynes. It might target balanced U.S. trade as one of its prime objectives.

On the other hand, it might introduce a surcharge or tax on foreign financial investment in the United States (such as the buying of U.S. treasuries) that would rise or fall opposite to the rise and fall of the U.S. trade deficit. Such a charge would be perfectly in keeping with all U.S. trade and international economic agreements and would operate to push the U.S. trade deficit toward balance.

In the run-up to the conclusion of the Uruguay round of WTO negotiations, the United States created a “war chest” to make tit-for-tat responses to the direct export subsidies of some of its trading partners. This led the subsidizing countries to agree that disciplines should be placed on such subsidies as part of the WTO rules. In like manner, it may be that the Trump team would consider countering the investment incentives being offered by many other countries with a similar kind of tit-for-tat war chest.

Finally, one of the nasty characteristics of economies that focus on export-led growth is their tendency, because of their direct and indirect subsidies to export production, to create enormous excess global production capacity in key industries such as steel, semi-conductors, aluminum, and cement. This in turn leads to dumping and the export of unemployment, which is illegal under both international and U.S. law. It should probably be assumed that such laws will be enforced by the new Trump team, to the extent that it could initiate anti-dumping actions itself rather than wait for complaints from private parties.

Of course, to have any chance of success, the Trump team will need the backing of a significant part of the U.S. labor and business communities. While these parties will not agree on other aspects of the Trump economic program, they would be well advised to carefully discern their interests—and the national interest—when it comes to trade and globalization.

The trade and globalization policies of both Democratic and Republican administrations over the past 70 years have been defined by an orthodoxy that has not helped American working men and women or the American middle class prosper. Whatever their other differences with Trump, those who have long been wishing for a more sensible trade policy would do well to listen carefully to what the new team is proposing.

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