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At the risk of understatement, I’ve been rather critical of Trump’s protectionism.

But not always. Last year, I praised him for floating the idea of zero taxes on trade between nations (even if I didn’t think he was serious).

And I point out in this interview that he is right about protectionism hurting financial markets.

Just in case you don’t believe me, here’s what Trump actually said, as reported by Business Insider.

President Donald Trump said Wednesday that the Dow Jones Industrial Average would be thousands of points higher if it weren’t for the trade war with China, which he started last year in an attempt to address trade practices that officials said put the US at a disadvantage. “Let me tell you, if I wanted to do nothing with China, my stock market, our stock market, would be 10,000 points higher than it is right now,” Trump told reporters at the White House. “But somebody had to do this. To me, this is much more important than the economy … It was out of control. They were out of control.”

Incidentally, what Trump is saying at the end of the excerpt could be true. There are times when growth should be a secondary concern.

To take an obvious example, it’s perfectly reasonable to have laws prohibiting companies from selling advanced military technology to potentially hostile governments.

My concern is that the president is too fixated on China’s largely irrelevant bilateral trade deficit. After all, that’s simply the flip side of America’s enormous investment surplus with China.

Instead, Trump should be pressuring Beijing to get rid of subsidies, cronyism, and other mercantilist policies (ideally by using the WTO).

Such reforms would help American companies since they would be competing on more of a level playing field.

And China’s economy would benefit even more since there would be less government intervention.

In other words, there’s a potential win-win conclusion to this trade war. But I’m not overly confident that President Trump or President Xi have the right goal in mind.

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Ronald Reagan must be turning over in his grave.

This newfound flirtation with industrial policy, mostly from nationalist conservatives, is especially noxious since you open the door to cronyism and corruption when you give politicians and bureaucrats the power to play favorites in the economy.

I’m going to cite three leading proponents of industrial policy. To be fair, none of them are proposing full-scale Soviet-style central planning.

But it is fair to say that they envision something akin to Japan’s policies in the 1980s.

Some of them even explicitly argue we should copy China’s current policies.

In a column for the New York Times, Julius Krein celebrates the fact that Marco Rubio and Alexandria Ocasio-Cortez both believe politicians should have more power over the economy.

…a few years ago, the phrase “industrial policy” was employed mainly as a term of abuse. Economists almost universally insisted that state interventions to improve competitiveness, prioritize investment in strategic sectors and structure market incentives around political goals were backward policies doomed to failure — whether applied in America, Asia or anywhere in between. …In the wake of the 2008 financial crisis, however, the Reagan-Bush-Clinton neoliberal consensus seems intellectually and politically bankrupt. …a growing number of politicians and intellectuals…are finding common ground under the banner of industrial policy. Even the typically neoliberal Financial Times editorial board recently argued in favor of industrial policy, calling on the United States to “drop concerns around state planning.” …Why now? The United States has essentially experienced two lost decades, and inequality has reached Gilded Age levels. …United States industry is losing ground to foreign competitors on price, quality and technology. In many areas, our manufacturing capacity cannot compete with what exists in Asia.

There are some very sloppy assertions in the above passages.

You can certainly argue that Reagan and Clinton had similar “neoliberal” policies (i.e., classical liberal), but Bush was a statist.

Also, the Financial Times very much leans to the left. Not crazy Sanders-Corbyn leftism, but consistently in favor of a larger role for government.

Anyhow, what exactly does Mr. Krein have in mind?

More spending, more intervention, and more cronyism.

A successful American industrial policy would draw on replicable foreign models as well as take lessons from our history. Some simple first steps would be to update the Small Business Investment Company and Small Business Innovation Research programs — which played a role in catalyzing Silicon Valley decades ago — to focus more on domestic hardware businesses. …Government agencies could also step in to seed investment funds focused on strategic industries and to incentivize commercial lending to key sectors, policies that have proven successful in other countries… the United States needs to invest more in applied research… Elizabeth Warren has also proposed a government-sponsored research and licensing model for the pharmaceutical industry, which could be applied to other industries as well. …Senator Gary Peters, Democrat of Michigan, has called for the creation of a National Institute of Manufacturing, taking inspiration from the National Institutes of Health. …A successful industrial policy would aim to strengthen worker bargaining power while organizing and training a better skilled labor force. Industrial policy also involves, and even depends upon, rebuilding infrastructure.

In other words, if you like the so-called Alexandria Ocasio-Cortez’s Green New Deal and Elizabeth Warren’s corporate cronyism, you’ll love all the other ideas for additional government intervention.

Oren Cass of the Manhattan Institute also wants to give politicians more control over the private economy.

My argument rests on three claims… First, that market economies do not automatically allocate resources well across sectors. Second, that policymakers have tools that can support vital sectors that might otherwise suffer from underinvestment—I will call those tools “industrial policy.” Third, that while the policies produced by our political system will be far from ideal, efforts at sensible industrial policy can improve upon our status quo, which is itself far from ideal. …Our popular obsession with manufacturing isn’t some nostalgic anachronism. …manufacturing is unique for the complexity of its supply chains and the interaction between innovation and production. …the case for industrial policy requires recognition not only of certain sectors’ value, but also that the market will overlook the value in theory and that we are underinvesting in practice. That the free market will not solve this should be fairly self-evident… Manufacturing output is only 12% of GDP in America… Productivity growth has slowed nationwide, even flatlining in recent years. Wages have stagnated. Our trade deficit has skyrocketed.

So what are his solutions?

Like Julius Krein, he wants government intervention. Lots of it.

Fund basic research across the sciences… Fund applied research… Support private-sector R&D and commercialization with subsidies and specialized institutes… Increase infrastructure investment… Bias the tax code in favor of profits generated from the productive use of labor… Retaliate aggressively against mercantilist countries that undermine market competition… Tax foreign acquisition of U.S. assets, making U.S. goods relatively more attractive… Impose local content requirements in key supply chains like communications… Libertarians often posit an ideal world of policy non-intervention as superior to the messy reality of policy action. But that ideal does not exist—messy reality is the only reality… That’s especially the case here, because you can have free trade, or you can have free markets, but you can’t have both.

I’m not sure what’s worse, an infrastructure boondoggle or a tax on inbound investment?

More tinkering with the tax code, or more handouts for industries?

And here are excerpts from a column for the Daily Caller by Robert Atkinson.

When the idea first surfaced in the late 1970s that the United States should adopt a national industrial policy, mainstream “free market” conservatives decried it as one step away from handing the reins of the economy over to a state planning committee like the Soviet Gosplan. But now, …the idea has been getting a fresh look among some conservatives who argue that, absent an industrial strategy, America will be at a competitive disadvantage. …Conservatives’ skepticism of industrial policy perhaps stems from the idea’s origins. It started gaining currency during the Carter administration, with many traditional Democratic party interests, including labor unions and politicians in the Northeast and Midwest, arguing for a strong federal role… However, over the next decade, as economic competitors like Germany and Japan began to challenge the United States in consumer electronics, autos, and even high-tech industries like computer chips, the focus of debates about industrial policy broadened to encompass overall U.S. competitiveness. …There was a bipartisan response…that collectively amounted to a first draft of a national industrial policy… But as the economic challenge from Japan receded…, interest in industrial policies waned. …The newly dominant neoclassical economists preached that the U.S. “recipe” of free markets, property rights, and entrepreneurial spirit inoculated America against any and all economic threats.

As with Krein and Cass, Atkinson wants to copy the failed interventionist policies of other nations.

But that was then and this is now — a now where we face intense competition from China. …Increasingly leaders across the political spectrum are returning to a notion that we should put the national interest at the center of economic policies, and that free-market globalization doesn’t necessarily do that… Conservatives increasingly realize that without some kind of industrial policy the United States will fall behind China, with significant national security and economic implications. …So, what would a conservative-inspired, market-strengthening industrial policy look like? …it would acknowledge that America’s “traded sector” industries are critical to our future competitiveness… The right industrial policy will advance prosperity more than laisse-faire capitalism would. …there are a significant number of market failures around innovation, including externalities, network failures, system interdependencies, and the public-goods nature of technology platforms. …this is why only government can “pick winners.” …It should mean expanding supports for exporters by ensuring the Ex-Im Bank has adequate lending authority… this debate boils down to a fundamental choice for conservatives: small government and liberty versus stronger…government that delivers economic security

What’s a “market-strengthening industrial policy”? Is that like a “growth-stimulating tax increase”? Or a “work-ethic-enhancing welfare program”?

I realize I’m being snarky, but how else should I respond to someone who actually wants to expand the cronyist Export-Import Bank?

Let’s now look at what’s wrong with industrial policy.

In a column for Reason, Veronique de Rugy of the Mercatus Center warns that American politicians who favor industrial policy are misreading China’s economic history.

…calls from politicians on both sides of the aisle to implement industrial policy. …These policies are tired, utterly uninspiring schemes that governments around the world have tried and, invariably, failed at. …As for the notion that “other countries are doing it,” I’m curious to hear what great successes have come out of, say, China’s industrial policies. In his latest book, The State Strikes Back: The End of Economic Reform in China?, Nicholas Lardy of the Peterson Institute for International Economics shows that China’s growth since 1978 has actually been the product of market-oriented reforms, not state-owned programs. …Why should we want America to become more like China? Here’s yet another politician thinking that somehow, the same government that…botched the launch of HealthCare.gov, gave us the Solyndra scandal, and can keep neither Amtrak nor the Postal Service solvent, can effectively coordinate a strategic vision for American manufacturing. …The real problem with industrial policy, economic development strategy, central planning, or whatever you want to call these interventions is that government officials…cannot outperform the wisdom of the market at picking winners. In fact, government intervention in any sector creates distortions, misdirects investments toward politically favored companies, and hinders the ability of unsubsidized competitors to offer better alternatives. Central planning in all forms is poisonous to innovation.

As usual, Veronique is spot one.

I’ve also explained that China’s economy is being held back by statist policies.

Veronique also addressed the topic of industrial policy in a column for the New York Times,

With “Made in China 2025,” Beijing’s 2015 anticapitalist plan for an industrial policy under which the state would pick “winners,” China has taken a step back from capitalism. …China’s new industrial policy has worked one marvel — namely, scaring many American conservatives into believing that the main driver of economic growth isn’t the market but bureaucrats invested with power to control the allocation of natural and financial resources. …I thought we learned this lesson after many American intellectuals, economists and politicians were proven spectacularly wrong in predicting that the Soviet Union would become an economic rival. …government officials cannot outperform the market at picking winners. In practice it ends up picking losers or hindering the abilities of the winners to achieve their greatest potential. Central planning is antithetical to innovation, as is already visible in China. …the United States has instituted industrial policies in the past out of unwarranted fears of other countries’ industrial policies. The results have always imposed great costs on consumers and taxpayers and introduced significant economic distortions. …Conservatives…should learn about the failed United States industrial policies of the 1980s, which were responses to the Japanese government’s attempt to dominate key consumer electronics technologies. These efforts worked neither in Japan nor in the United States. The past has taught us that industrial policies fail often because they favor existing industries that are well connected politically at the expense of would-be entrepreneurs… We shouldn’t allow fear-mongering to hobble America’s free enterprise system.

Amen.

My modest contribution to this discussion is to share one of my experiences as a relative newcomer to D.C. in the late 1980s and early 1990s.

I had to fight all sorts of people who said that Japan was eating our lunch and that the United States needed industrial policy.

I kept pointing out that Japan deserved some praise for its post-WWII shift to markets, but that the country’s economy was being undermined by corporatism, intervention, and industrial policy.

At the time, I remember being mocked for my supposed naivete. But the past 30 years have proven me right.

Now it’s deja vu all over again, as Yogi Berra might say.

Except now China is the bogeyman. Which doesn’t make much sense since China lags behind the United States far more than Japan lagged the U.S. in the 1980s (per-capita output in China, at best, in only one-fourth of American levels).

And China will never catch the U.S. if it relies on industrial policy instead of pro-market reform.

So why should American policy makers copy China’s mistakes?

P.S. There is a separate issue involving national security, where there may be legitimate reasons to deny China access to high-end technology or to make sure American defense firms don’t have to rely on China for inputs. But that’s not an argument for industrial policy.

P.P.S. There is a separate issue involving trade, where there may be legitimate reasons to pressure China so that it competes fairly and behaves honorably. But that’s not an argument for industrial policy.

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Earlier this year, I identified Trump’s “worst ever tweet.”

I was wrong. That tweet, which displayed an astounding level of economic ignorance, is now old news.

Trump issued a tweet yesterday that is far worse because it combines bad economic theory with horrifying support for massive economic intervention. Pay special attention to the part circled in red.

Huh?!?

Since when does the President get to dictate where companies can do business?

Unfortunately, whenever he wants to.

Congress has delegated to the President massive “emergency” powers over the economy. Specifically, the International Emergency Economic Powers Act (IEEPA) is a blank check.

Here are some excerpts from a report by the Congressional Research Service.

By the twentieth century, …Congress created statutory bases permitting the President to declare a state of emergency and make use of extraordinary delegated powers. …The International Emergency Economic Powers Act (IEEPA) is one such example of a twentieth-century delegation of emergency authority. …IEEPA grants the President extensive power to regulate a variety of economic transactions during a state of emergency. …Since 1977, Presidents have invoked IEEPA in 54 declarations of national emergency. On average, these emergencies last nearly a decade. Most emergencies have been geographically specific, targeting a specific country or government. …No President has used IEEPA to place tariffs on imported products from a specific country or on products imported to the United States in general. However, …such an action could happen. In addition, no President has used IEEPA to enact a policy that was primarily domestic in effect. Some scholars argue, however, that the interconnectedness of the global economy means it would probably be permissible to use IEEPA to take an action that was primarily domestic in effect. …Neither the NEA nor IEEPA define what constitutes a “national emergency.” …While IEEPA nominally applies only to foreign transactions, the breadth of the phrase, “any interest of any foreign country or a national thereof” has left a great deal of room for executive discretion.

You can click here for the actual legislative language of IEEPA.

You’ll see that the President has the power, for all intents and purposes, to severely disrupt or even block financial transactions between people and/or companies in the United States and people and/or companies in a designated foreign country.

And there’s no limit on the definition of “emergency.”

One could argue that an emergency declaration and a ban on the movement of money wouldn’t necessarily prohibit a company from doing business in a particular jurisdiction, but it surely would have that effect.

The economic consequences would be profound. In a negative way.

By the way, the White House Bureau Chief for the Washington Post responded to Trump’s tweet with one of his own.

He says the President, who criticizes socialism, is acting like a socialist.

He’s actually wrong, at least technically.

Socialism is government ownership and control of the means of production.

What Trump is seeking is private ownership and government control. And there’s a different word for that economic policy.

P.S. It’s a good idea for the U.S. government to have powers to respond to a genuine emergency. But it shouldn’t be the decision of one person in our separation-of-powers system. It was a bad idea when Obama was in the White House, and it’s a bad idea with Trump in the White House.

In peacetime, an emergency should require the approval of Congress. In wartime, it should require approval of the House and Senate leadership from both parties.

P.P.S. Trade laws are another example of Congress delegating too much power to the executive branch.

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A week ago, I wrote about the turmoil in Hong Kong and pointed out that a crackdown would be bad for China’s already-faltering economy.

I had a chance to again address the issue yesterday.

What made this interview different is that it included a discussion of what Trump should do.

My expertise is economics rather than diplomacy, but I speculated that public warnings and/or threats by Trump might backfire.

The Wall Street Journal opined today on this issue and they want Trump to be aggressive. Here are some excerpts.

The stakes are rising in Hong Kong, as clashes between pro-democracy protesters and the local government backed by China are escalating. The damage could be global if President Xi Jinping orders a bloody crackdown, and President Trump should be warning the Chinese President not to do it. …The protests began in June when the Legislative Council tried to ram through a bill that would allow Beijing to extradite anyone in Hong Kong to the mainland. Amid overwhelming public opposition, Ms. Lam has declared the legislation “dead” but refused to withdraw it. Police have responded to the protests with hundreds of arrests and increasing brutality. Hong Kong’s cause should be the free world’s… An invasion of Hong Kong would violate China’s treaty with Britain and poison U.S.-Chinese relations.

I agree that the Trump Administration should seek to deter intervention, but I think any warnings – at least at this point – should be conveyed behind the scenes.

In my fantasy world, Trump would strike a deal with China, and agree to drop his misguided trade taxes in exchange for China not messing with Hong Kong.

Sadly, my fantasies rarely become reality.

So I’ll close with a practical point. I mentioned in the interview that the people of Hong Kong are much richer than the people of China. Here’s the evidence, based on the Maddison database, as well as the numbers from the International Monetary Fund and World Bank.

My takeaway from these numbers, as I suggest in the title, is that China should send economists to Hong Kong rather than troops. They could learn important lessons about the benefits of free markets and limited government.

Heck, it wouldn’t be a bad idea to send American economists as well. Indeed, since it gets the top score from Economic Freedom of the World, the entire world can learn from Hong Kong’s spectacular success.

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For libertarians, there aren’t many good role models in the world. There are a few small jurisdictions such as Bermuda, Monaco, and the Cayman Islands that are worth highlighting because of strong rule of law and good fiscal policy. There are also a few medium-sized nations that are – by modern standards – very market-oriented, such as Switzerland, Singapore, and New Zealand.

But Hong Kong generally gets top rankings for economic liberty. Which helps to explain why I’m so worried about a potential crackdown by China.

As I noted in the interview, intervention by Chinese security would not be good news for Hong Kong.

But it also would be bad news for China’s economy. Especially since it already is dealing with the adverse consequences of both internal statism and external protectionism.

Indeed, the only reason I’m not totally pessimistic is that the power elite in China doubtlessly would experience a big loss in personal wealth if there is a crackdown.

That being said, I can’t imagine President Xi will allow China’s implicit control over Hong Kong to diminish. So I’m reluctant to make any prediction.

But I very much hope that Hong Kong will emerge unscathed, in part because I don’t want to lose a very good example of the link between economic liberty and national prosperity.

Marian Tupy, writing for CapX, explains that Hong Kong is a great role model.

In 1950, …compared to the advanced countries of the West, Hong Kong was still a relative backwater. …the average resident of the colony earned 35 per cent and 25 per cent compared to British and American citizens respectively. Today, average income in Hong Kong is 37 per cent and 3 per cent higher than that in the United Kingdom and America. …Unlike some British ex-colonies and the United Kingdom itself, Hong Kong never experimented with socialism. Historically, the government played only a minor role in the economy… The territory kept taxes flat and low… The territory followed a policy of unilateral trade liberalisation, which is to say that the colony allowed other countries to export to Hong Kong tariff-free, regardless of whether other countries reciprocated or not. …In 1755, the great Scottish economist Adam Smith…wrote, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice…” Hong Kong prospered because it followed Smith’s recommendations.

Here’s his chart showing how Hong Kong has surpassed both the United Kingdom and United States in terms of per-capita economic output.

In a column for the Wall Street Journal, Jairaj Devadiga explains a key factor in Hong Kong’s success.

Sir John Cowperthwaite was Hong Kong’s financial secretary from 1961-71 and is widely credited for the prosperity Hong Kong enjoys today. An ardent free-marketeer, Cowperthwaite believed that government should not try to manage the economy. One salient feature of Cowperthwaite’s policies: His administration didn’t collect any economic data during his tenure. Not even gross domestic product was calculated. When the American economist Milton Friedman asked why, Cowperthwaite replied that once the data were made available, officials would invariably use them to make the case for government intervention in the economy. …Without data, busybody bureaucrats had no way of justifying interference in the economy. In Cowperthwaite’s Hong Kong, the government did only the bare minimum necessary, such as maintaining law and order… The rest was left to the private sector. …When asked what poor countries should do to emulate Hong Kong’s success, he replied, “They should abolish the office of national statistics.”

Amen.

When you give data to politicians and bureaucrats, they generally find something they don’t like and then can’t resist the temptation to intervene.

Now that we’ve looked at some of the factors that enabled Hong Kong’s prosperity, let’s consider what may happen if there’s a crackdown by China.

Professor Tyler Cowen shares a pessimistic assessment in his Bloomberg column.

Hong Kong has been a kind of bellwether for the state of freedom in the wider world. …By 1980, Milton Friedman’s “Free to Choose” series was on television, portraying Hong Kong as a free economy experiencing huge gains in living standards. The skyline was impressive, and you could get all the necessary permits to start a business in Hong Kong in just a few days. The territory showed how Friedman’s theories worked in the real world. Hong Kong stood as a symbol of a new age of freer markets and growing globalization. …Hong Kong still ranks near or at the top of several indices of economic freedom. But…[n]ot only is there the specter of Chinese intervention, but there is also a broader understanding that the rules of the game can change at any time… Meanwhile, many Hong Kong residents know their behavior is being monitored and graded, and they know the role of the Chinese government will only grow. …Freedom is not merely the ability to buy and sell goods at minimum regulation and a low tax rate, variables that are readily picked up by economic freedom indices. Freedom is also about the…legitimacy and durability of their political institutions. …Circa 2019, Hong Kong is a study in the creeping power and increasing sophistication of autocracy. While it is possible there could be a Tiananmen-like massacre in the streets of Hong Kong, it is more likely that its mainland overlords will opt for more subtle ways of choking off Hong Kong’s remaining autonomy and freedoms. …right now, I would bet on the Chinese Communist Party over the protesters.

If Cowen is right, one thing that surely will happen is that money will flee.

And that may already be happening. Here are some excerpts from a Bloomberg report.

Private bankers are being flooded with inquiries from investors in Hong Kong…wealthy investors are setting up ways to move their money out of the former British colony more quickly, bankers and wealth managers said. A major Asian wealth manager said it has received a large flow of new money in Singapore from Hong Kong over recent weeks, requesting not to be identified due to the sensitivity of the issue. One Hong Kong private banker said the majority of the new queries he receives aren’t coming from the super-rich, most of whom already have alternative destinations for their money, but from individuals with assets in the $10 million to $20 million range. …The extradition fight reinforced concerns among Hong Kong investors and democracy advocates alike that the Beijing-backed government is eroding the legal wall separating the local judicial system from the mainland’s. …The recent demonstrations are the latest trigger in a long process of Chinese money flowing to Singapore, London, New York and other centers outside Beijing’s reach. …“Hong Kong has shot itself in the foot,” said Chong, a Malaysian who has permanent residency in both Hong Kong and Singapore. “Can you imagine Singapore allowing this?”

And keep in mind that big money is involved. Here’s a chart that accompanied the analysis.

Looking at these numbers, I want to emphasize again that China also will suffer if a crackdown causes money to flee Hong Kong.

Which is President Xi should resist the urge to intervene.

I’ll close with this visual depiction of Hong Kong’s amazing growth.

Let’s hope Beijing doesn’t try to reverse this progress.

P.S. You’ll notice that I didn’t advocate for democracy, either in this column or in the interview. That’s because I’m more concerned with protecting and promoting liberty. Yes, it’s good to have a democratic form of government. If I understand correctly, there’s also an empirical link between political freedom and economic freedom. But sometimes democracy simply means the ability to take other people’s money, using government as the middleman. That’s why the people of not-very-democratic Hong Kong are much better off than the people of democratic Greece.

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Earlier this month, I commented on a Wall Street Journal report that expressed puzzlement about some sub-par economic numbers in America even though politicians were spending a lot more money.

I used the opportunity to explain that this shouldn’t be a mystery. Keynesian economics never worked in the past, so it shouldn’t be a surprise that it’s not working today.

This is true in the United States, and it’s true in other nations.

Speaking of which, here are some excerpts from a story in the Wall Street Journal about China’s sagging economy.

A strategy by Chinese policy makers to stimulate the economy…hasn’t stopped growth from slowing, stoking expectations that Beijing will roll out more incentives such as easier credit conditions to get businesses and consumers spending. …The breakdown of second-quarter figures shows how roughly 2 trillion yuan ($291 billion) of stimulus, introduced by Premier Li Keqiang in March, is failing to make business owners less risk-averse. …While Beijing has repeatedly said it wouldn’t resort to flooding the economy with credit, economists say it is growing more likely that policy makers will use broad-based measures to ensure economic stability. That would include fiscal and monetary stimulus that risks inflating debt levels. Policy makers could lower interest rates, relax borrowing restrictions on local governments and ease limits on home purchases in big cities, economists say. Measures they could use to stimulate consumption include subsidies to boost purchases of cars, home appliances and other big-ticket items.

This is very worrisome.

China doesn’t need more so-called stimulus policies. Whether it’s Keynesian fiscal policy or Keynesian monetary policy, trying to artificially goose consumption is a dead-end approach.

At best, temporary over-consumption produces a very transitory blip in the economic data.

But it leaves a permanent pile of debt.

This is why, as I wrote just a couple of days ago, China instead needs free-market reforms to liberalize the economy.

A period of reform beginning in the late 1970s produced great results. Another burst of liberalization today would be similarly beneficial.

P.S. Free-market reforms in China also would help cool trade tensions. That’s because a richer China would buy more from America, thus appeasing folks like Trump who mistakenly fixate on the trade deficit. More important, economic liberalization presumably would mean less central planning and cronyism, thus mitigating the concern that Chinese companies are using subsidies to gain an unfair advantage.

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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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