Late last week, the US and China walked away from a pending bilateral trade agreement and have once again escalated tit-for-tat import tariffs. Their provisional agreement seemed briefly to resolve the year-old trade war launched by the Trump administration. On the American side, the announced sticking point was China’s unwillingness to put into law agreements restricting intellectual property theft, coercion of foreign corporations, and subsidies to favored industries.  

Stretching back to the 1970s, China has indeed tilted the competitive economic playing field in its favor, with tactics both blatant and subtle. China has emerged as a global economic superpower to rival the USA and the European Union. And China’s ambition to transform critical sectors by 2025 – artificial intelligence, bio-technology, aerospace, renewable energy – does pose challenges, not only to some US corporations but also to US national security.  

However, my 50 years of experience as a student of US economic history and international development convinces me there are two core flaws in America’s self-righteous and narrowly nationalistic reaction to China’s strategy for economic dominance. (This critique is separate from the dubious Trumpian tactic of putting all our eggs in the tariff basket.) First, the US cannot claim the moral high ground in urging China to stop subsidizing key industries when we have done the same for over two centuries. Second, China’s aggressive growth strategy poses challenges and imposes costs that are global in scope: ultimately, this is not a bilateral contest and it is not, in Trump’s words, “easy to win.”  

Of course, China’s state-directed hybrid economy differs vastly from America’s “free enterprise” capitalism.  But we have a deep history of government-supported industrial development, tracing back to Hamilton’s import tariffs protecting the Northern states’ “infant industries” and massive Federal land grants to underwrite the trans-continental railroads. More recent examples indicate that the US government continues to subsidize priority sectors. Civilian nuclear power is an offspring of WW II’s drive to develop atomic weapons. Recent 50th anniversary celebrations of the first Apollo lunar landing have highlighted the benefits of spinoff technologies. The Internet and GPS emerged from Defense Advanced Research and NASA projects. And countless current medical breakthroughs – not to mention Big Pharma profits — build on publicly-funded research, such as the Human Genome Project. 

Today’s developing economies, from India to Mexico, employ an array of public subsidies to promote their “lead sectors” and attract foreign investors. (From a global perspective, China may be less remarkable for the extent of its public subsidies than for their effectiveness.) The United States does not condemn such measures out of hand and, for seven decades, it has led efforts to set uniform global rules of the game. Today, that is the World Trade Organization’s mandate. The WTO tribunal has, in fact, made numerous rulings against China’s unfair trade practices. But the Trump administration, with its fixation on “America First” and the Chinese strategic rivalry, has turned its back on multilateral institutions for setting and enforcing fair trade practices.  

To many of us who followed international negotiations during the Obama years, the biggest blunder of Trump’s go-it-alone economic policy was his early rejection of the Trans Pacific Partnership (TPP). The TPP was essentially a collective China containment policy, reinforcing US leverage with the clout of other key players: Japan, Canada, Australia, Singapore, and South Korea, among others. Despite unresolved shortcomings, the TPP would have presented China with tough, unified negotiating positions regarding many of the practices that are currently at issue, such as intellectual property rights and industrial subsidies. What’s more, the TPP strengthened labor and environmental protections — irrelevant to Donald Trump but crucial for the well-being of working people and the health of the planet.  

Let us hope that the current US-China standoff does not do too much lasting economic damage; and that the 2020 election will replace a foreign policy ignoramus as president and sweep out pernicious advisors like Larry Kudlow, John Bolton and that behind the scenes cynic, Steve Bannon. 

David Vail is Adams Catlin Professor of Economics emeritus at Bowdoin College. 

Copy the Story Link

Comments are not available on this story.