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China, Trade Policy—and the 2012 Election

12:00 AM, Sep 29, 2012 • By IRWIN M. STELZER
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Free trade might not be the first casualty of an American election campaign, but it is right up there in the top rank. President Obama is bashing Mitt Romney for sending jobs to China when he ran Bain Capital, and Romney is returning the favor by accusing Obama of failing to label China a currency manipulator, and “being China’s doormat at the expense of America’s workers.” When the alleged unfair trading partner is China, which is threatening its neighbors and our allies with territorial claims backed up by a growing military, and using the earnings from trade to fund that military’s new ability to project power by adding aircraft carriers to its fleet, there is no reason to expect calm analysis from vote-hungry politicians.

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Which is, in a way, a good thing. For too long America’s politicians have chosen to ignore the fact that the leaders of China’s regime have viewed trade from a different vantage point than have their American and European counterparts. For China, trade is about jobs for the millions of workers who, if they could not find work, would constitute a reserve army of unemployed workers, to borrow from Karl Marx, ready to challenge the regime. It is also about taking a great leap forward into the era of modern technology. To accomplish those goals—lots of jobs and acquisition of the latest technology—China must sell everything from trainers and $100 microwave ovens to solar panels and auto parts to America and other markets. And to get access to technology, it must require firms seeking to tap its market to set up factories in China and make their technology available to Chinese firms. Or simply steal it.

So the fact that the election campaign is forcing politicians in both parties to say “enough is enough,” or at least to promise to do that if elected, is not only consistent with U.S. interests in establishing a fair trading system, but with the advice of none other than Adam Smith, who wrote, “when some foreign nation restrains … the importation of some of our manufactures into their country … revenge naturally dictates retaliation.”

There are several things to keep in mind about U.S. policy on trade in this election year. The first is an inversion of the usual line-up of forces. The trade unions, traditionally protectionist and Democratic, are unhappy with the president, their president, for not being tough enough with the Chinese. Meanwhile, a great part of the corporate community, traditionally in favor of free trade, is cross with Romney for his protectionist tilt, and pleased that the President has not declared China a currency manipulator, which it is. The Chinese take a long view, and one that factors in national interest. You want markets, we want technology. Their American trading partners march to the tune of quarterly earnings reports, look to their bottom lines, and so share their technology with the Chinese in order to have access to their market and ring up sales, now. The Chinese take the longer and nationalistic view: by allowing some imports they will achieve their long-term goal of overtaking the U.S. technologically and militarily.

The second thing to keep in mind is that we are in the final stages of a close-run presidential campaign. That’s why Obama trekked to the swing state of Ohio to announce the filing of a complaint at the World Trade Organization against China’s subsidization of exports of auto parts, a key industry in Ohio. Although the U.S. auto-parts industry lost hundreds of thousands of jobs since Obama took over the reins of U.S. trade policy, only with an election impending—early voting in Ohio starts four days from now—did the president move against China for lavishing $1 billion in subsidies and tax breaks on its industry. And the challenger, a businessman who surely knows he cannot turn back the tide of globalization, feels compelled to match the president’s new-found toughness on trade because the majority of Republicans want a tougher policy on China than do most Democrats, although my guess is that Republicans are less concerned about trade deficits than China’s insistence that America get out of China’s Asia-Pacific backyard to leave it free to assert its far-reaching territorial claims against Japan, the Philippines, Vietnam, and other American allies.

The third thing to keep in mind is that campaign rhetoric is not a sure predictor of a candidate’s policy. Obama promised to cut the deficit in half before more than doubling it; Romney promises to repeal Obamacare after introducing the model for that health care plan when governor of Massachusetts. So, too, with trade. The Obama administration pushed through congress free trade agreements with Korea, Panama and Colombia. It warned congress not to impose duties on Chinese goods to offset the undervaluation of the yuan. And simultaneous with his tough trade rhetoric, Obama is leading the drive for a Trans-Pacific Partnership that will open trade with several countries in the region, touting the TPP as a means of increasing U.S. competitiveness with China. As for Mitt Romney, only last month he called for a hemispheric free trade zone with Latin American countries. John Mitchell, Richard Nixon’s attorney general, who later spent 19 months in jail for doing what he said he didn’t during the Watergate scandal, famously said, “Watch what we do, not what we say.” The current candidates for the office once held by Mitchell’s boss are not quite that candid.

The final thing to keep in mind about trade policy is that China’s economy is stumbling as export growth shrivels—just when a new regime needs to establish its authority, and the workforce is striking and at times rioting for better pay and working conditions. The nation’s cost advantage vis-à-vis the U.S. is either falling or, in many industries, completely gone, and the profits of the country’s major industrial companies are in decline—down 6.2 percent in August after falling 5.4 percent in July. The Boston Consulting Group titles its latest study of China “The End of Easy Growth,” and Johns Hopkins University economist Ho-Fung Hung tells the New York Times, “The situation is looking increasingly dire.” The decision of China’s central bank to pour cash into the nation’s banking system ($58 billion in the last few days of this week) might, but only might, give growth a boost in the near term. In the longer term, China will have to decide to live with the massive misallocation of capital resulting from government support of its monopoly, state-owned enterprises, or take steps to move further down the road to something closer to U.S.-style market capitalism. A new, uncertain regime is more rather than less likely to opt for retaining the status quo.

That makes it likely that the regime will continue to divert its masses’ attention from the economy by belligerent moves in the South China Sea, and that the next president of China will resist any efforts by the next president of the United States to deprive his country of the advantages it derives from its unfair trading practices.

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