As I explained last year, Trump is right and wrong about China and trade. He’s correct that China doesn’t play fair, but he mistakenly fixates on the trade deficit rather than going after China’s subsidies and cronyism.
And, as I note in this brief interview from yesterday, he’s making a mistake by not using the World Trade Organization to curtail China’s anti-market policies.
For further information, I wrote a column about the five things everyone should understand about the US-China trade squabble.
But I also think there are two points from the interview that deserve elaboration.
- First, I should not have said the WTO was a “threat” to China. Yes, the Geneva-based organization almost surely would rule against many of China’s policies, but getting rid of subsidies and cronyism would be very beneficial for the Chinese economy. In other words, China would enjoy more growth and prosperity if it had to fix its bad policies in response to adverse WTO rulings. And, of course, the United States and other countries also would benefit as well.
- Second, I want to explain what I meant in my closing point about whether China could “trick Trump.” The best outcome of negotiations is genuine free trade between the US and China, with no subsidies and cronyism to tilt the playing field. But since Trump wrongly fixates on trade balances, I worry that China might seek to preserve its bad policies and instead mollify the president by agreeing to something gimmicky (like purchasing X tons of soybeans or importing Y number of cars).
I’ll close by addressing a common complaint that the WTO would not be an effective vehicle for liberalization.
Given how trade taxes have dropped since the WTO was created, I think this is a very bizarre assertion.
Unlike other international organizations, which have dismal track records, the WTO has actually helped increase economic freedom around the world.
And that’s good news for America. And the rest of the world as well.
The WTO also is willing to stand up to China when it’s wrong. Here are some excerpts from a recent report by Reuters.
China has halted a dispute at the World Trade Organization over its claim to be a market economy, a panel of three WTO adjudicators said on Monday… One trade official close to the case said so much of the ruling had gone against Beijing
that it had opted to pull the plug before the result became official. “They lost so much that they didn’t even want the world to see the panel’s reasoning,” the official said. …China had insisted that they treat it as a “market economy”, countering their view that the price of Chinese exports could not be taken at face value due to state interference in the economy. …the United States and the EU…said Chinese goods — especially commodities such as steel and aluminum — were still heavily underpriced because of subsidies and state-backed oversupply.
Last but not least, here’s a chart from the Peterson Institute showing how the United States has been the most active participant in the WTO’s process for dispute resolution.
The bottom line is that both China and the United States will benefit if there’s more economic freedom and less government intervention.
But Trump doesn’t understand trade and China’s leaders don’t want to give up their grip on the allocation of capital. So I’m not holding my breath waiting for a good outcome.
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