Should We Still Trade With China? Should the Eagle Abandon the Dragon?

With China’s Premier in town, it seems a good time to review where the United States stands vis-a-vis China in the realm of trade.  China is still nominally a Communist state.  It is an authoritarian state.  It imprisons its citizens on the basis of their thoughts without affording them due process of law or access to counsel.  This was notable recently in the case of one of its domestic dissidents that actually received a Nobel Prize.  Its reaction was outrageous.  It utters nonsensical platitudes about harmoniousness only slightly less bizarre than its neighbor North Korea.  Read any of the official websites and you will see this.  The Onion had a very funny issue that exemplified this about a year ago.

China was closed to the west until Nixon “opened” it some 3 decades ago.  But what really set the current state of affairs was its accession to the WTO in 2002, a scant 9 years ago.  Their inclusion in the global trading framework of low tarriffs is what allowed China to become the producer to the world and creditor to America, resulting in what some now call Chimerica.  There are serious arguments that China has gotten the better of this deal.  They have been able to start building a middle class.  Note that other internal reforms aided this transformation, but trade with the US and Europe was the sine qua non for lifting a billion people out of poverty and creating massive wealth in Asia.  In the US, we have been able to have low prices and greater availability of goods for consumption.  But we have also offshored a great deal of labor, resulting in downward pressure on wages and a downward adjustment to the quality of labor available to workers here.  We have also had very low interest rates as a result of the recycling of trade dollars into US Treasuries.  As a result we have had asset bubbles that have subsequently burst and our profligate leaders have run up the US debt to staggering levels.

One wonders whether the tradeoff between sending jobs involved in the making of stuff abroad and being able to pay less for consumer goods is a good one.  That is the gamble the West made in the creation of Chimerica.  As the high-paying work is now more and more intellectual in nature, we are witnessing a widening rift between those who have and those who have not.  This is not a healthy development.  Is there enough mental firepower in our population, or any population, to provide meaningful standard of living when the jobs that provide such livings pass some high threshold of requiring mental acuity rather than physical?  The early results are not promising.

Finally the other positive outcome that was supposed to result from the gamble of engaging an authoritarian state like China was that increasing wealth there would lead to liberalization.  How long will we run this experiment?  Will it take more than a generation or two to assess whether such liberalization has occurred?  For it has not occurred to date.  I said at the time (2002) that rewarding a state like China with GATT membership was not going to end well.  In fact there has been an dangerous emerging concensus that maybe China has the better system, as opposed to the United States.  And the world is less free.  Is this a blip down which will resolve into greater freedom once China reaches some threshold of wealth?  Or have we passed the peak.  Time will tell.

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