Bashing China with American Protectionism is Dumb

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close up clothing label made in china
close up clothing label made in china

Whenever we buy products made in China— and by “we” I mean citizens not just in America but also in other countries now grappling with a rising China like India, Japan, the Philippines, Singapore, South Korea, and Taiwan— we as consumers are helping to finance a Chinese military buildup that may well do us and our countries harm.

Navarro, Peter. Crouching Tiger: What China’s Militarism Means for the World

What really makes China so scary today is the fact that it has so many people, and it’s also becoming an incredibly wealthy country so that our great fear is that China will turn into a giant Hong Kong. And if China has a per capita GNP that’s anywhere near Hong Kong’s GNP, it will be one formidable military power. So a much more attractive strategy would be to do whatever we can to slow down China’s economic growth— because if it doesn’t grow economically, it can’t turn that wealth into military might and become a potential hegemon in Asia.

University of Chicago Professor John Mearsheimer (Approvingly quoted in Crouching Tiger)

Nobody as yet knows what President-elect Trump will do on the China front. University of California economist Peter Navarro is, according to normally unreliable media sources, a key advisor to Donald Trump. No one knows for sure just how influential he is with Trump and I may be criticizing a straw man. But his latest book, Crouching Tiger: What China’s Militarism Means for the World, in many ways is a primer for all those Americans who distrust globalization, China and world trade. I disagree with this book’s major themes. But, as renowned Chinese strategist Sun Tzu might have said if he had thought of it, sometimes to know your enemy you have to read his books.

In Crouching Tiger, Navarro has roundly criticized China, admittedly justifiably, for its own protectionist and mercantilist policies. As readers of The Dismal Optimist know, I have continuously argued that the East Asian economic strategy, followed by Taiwan, Japan, Korea and now China, is highly protectionist and discriminatory against American products and companies.

But Navarro’s solutions are worse than the problem and seem like an update of “yellow peril” thinking. If the author of The Art of the Deal were to use some of Navarro’s criticisms in negotiating with China, that might be a positive. But Crouching Tiger goes far beyond advocating simple protectionism and, in my opinion, is downright dangerous. It argues for American protectionism/mercantilism on geopolitical grounds. The quotes above give the reader a pretty good idea of what Navarro is advocating.

Crouching Tiger argues that a wealthier China will become a militarily stronger China which will threaten the United States and its current hegemony over Southeast Asia. The book is filled with alarmist chapters about improvements in China’s military prowess. Therefore the United States should embark on protectionist economic policies which will make China poorer, such as the proposed 45 percent tariff on Chinese imports. In other words, the US should do its protectionist best to “screw” China, anyway it can. Although he trots out the usual arguments that cheap Chinese labor has hurt American workers, Navarro cheerfully admits that American protectionist measures will raise the cost of formerly imported Chinese goods and hurt the American poor. The impression the reader gets from reading this book is that cutting off trade with China may actually be harmful to the US economy but that it will be worth doing because it will be more harmful to China.

Let’s hope Trump doesn’t buy into this stuff.

Nine Alternative Views

  1. The biggest threat to American military hegemony in Asia and everywhere else is not China. Rather it is the burgeoning American welfare state. As an example, Navarro laments the curtailment of the American F-22 fighter plane production. But F-22 production was shot down not by Chinese missiles but by American budgetary restraints. Trump has argued that faster economic growth will pay for all the entitlements. Maybe. But how does the US get faster economic growth if it disrupts the economy with measures to cut off international trade?
  1. If the American dream requires making other people poorer, America needs a new dream. The United States rebuilt a devastated world after WWII by establishing global trading and monetary systems and assisting the revival of devastated Germany and Japan. The United States successfully held off the spread of communism while avoiding a nuclear conflict. When the triumvirate of Margaret Thatcher, Ronald Reagan and Deng Xiaoping effectively ruled the world in the 1980s and the Berlin Wall fell, it was the American sponsored ideas of free markets that prevailed. In this environment, on the footsteps of the Asian tigers and Japan, China made a miraculous leap forward and pulled hundreds of millions out of poverty. America and its free market Pax Americana can take a lot of credit for setting the global framework that made this possible. But now the new American policy should be to make Chinese people poor? This policy is unworthy of Ronald Reagan’s “shining city on a hill.” There must be a better way to achieve American geopolitical objectives.
  1. Fighting Chinese protectionism/mercantilism with American protectionism/mercantilism sets the world on a dangerous downward deflationary spiral similar to that which prevailed at the outset of the Great Depression. I don’t want to minimize Chinese faults. For example, the Chinese have over-invested in industries like steel and have dumped cheap steel around the world. They find reasons not to allow American companies like Google and Facebook to operate in China. They do force American companies to share their technology as the price of admission for doing business in China. The list goes on. President Trump should be on their case for this and he is the go-to man for making a deal. Ronald Reagan compromised from time to time. But shutting down US-China trade is not the answer.
  1. It is foolish to think America’s allies in Asia would go along with an American protectionist/mercantilist- punish-China program. China with its 1.4 billion now increasingly wealthy and better educated people, is reasserting what had been its historical preeminent role in Asia prior to the arrival of the European colonial powers in past centuries. Once upon a time in the not-that-distant past, the various countries surrounding China paid regular tribute to the Son of Heaven, as the Chinese emperor was called. Americans may not know this but Asians remember. The United States is going to have to come to terms with this. America guarding Asians against Asians has worked well up until now but it may not be the long term nature of things. The other Asian countries do not want to have to choose between the US and China. They do not want to increase their own inflation rates with 45% tariffs on Chinese imports and risk China’s wrath for doing so.
  1. It is too late to be punishing China. A punish-China program would set China back – by maybe a step. China today can boast a vast supply of technically proficient people and advanced, mostly private sector institutions. Baidu, Alibaba , Tencent, the Beijing Genomics Institute (BGI), to name just a few. But despite these examples, China has not caught up to the US yet and maybe never will unless it undertakes massive economic and political reforms. I am a firm believer in the view that a free, open and fiscally responsible US can maintain its technological and military superiority over a closed and restricted China.
  1. Worrying about China being a currency manipulator is a waste of time. Currency manipulation is very quickly self-defeating as economies adjust. China, by buying dollars, held down the value of its currency. Starting in roughly in 2006 from a $500 billion level, Chinese dollar reserves soared to a peak of almost $4 trillion in 2015. This holding down of the renminbi had a one-time effect whereby Chinese labor became cheaper vis-a-vis foreign markets. But, as the reserves were mounting, China’s economy was adjusting. Its price of labor was rising, offsetting the currency manipulation. Now, some of its factories are moving to cheaper locales like Vietnam, it is losing the dollar reserves it accumulated and market forces are forcing the renminbi lower. The time for screaming “currency manipulator” has passed. If it was worth screaming at all, the Obama Administration should have done it when Chinese dollar reserves were galloping upward. A similar story could be written for Japan which under the Abe administration in 2012 aggressively pushed down the value of the yen. Japan is as big a currency manipulator as China. And now the yen has rallied despite the actions of the Bank of Japan and the Abe government.
  1. The United States has been the first choice of global top talent. Restricting the H-1B visa program would be an act of economic insanity. No question globalization has not worked to the advantage of blue collar, less educated American workers who have had to compete with much cheaper Chinese and other foreign labor. But what does this have to do with skilled workers coming into the US on H-1B visas? Those with coding, mathematical and/or managerial skills are in short supply. There is a global “war” for top talent. Does America want to lose this talent war? So many American tech companies have immigrant founders and CEOs. The Canadians are already salivating that, thanks to coming American restrictions, they can attract more high quality immigrants. Yes, it would be nice if the American educational system could produce more of these talented individuals. But deficiencies with the American educational system will not be solved by slamming the immigration door shut on foreign talent. Moreover it is curious that, if America’s educational system is so bad, why are its universities filled with Indian, Chinese and other foreign students who as a group are specializing in the sciences and business? And one wonders if Trump has underrated the resilience of the American rust belt. One book where you find a different opinion: The Smartest Places on Earth, Why Rustbelts Are the Emerging Hotspots of Global Innovation, by Antoine van Agtmael and Fred Bakker. The title says it all.
  1. The global corporation has outgrown the nation state. Globalization and the global corporation may have become bad words in political circles but economic reality is otherwise. As an engine of globalization, the corporation is perhaps the major force for peace, prosperity and technological progress. It achieves the most efficient use of resources and thus furthers overall human welfare. The senior managements of these companies are not disloyal to their home countries but are simply responding to market signals and expanding technological possibilities. There are endless examples of how globalization has improved efficiency and human welfare. Boeing for example assembles its new state-of-the-art airliners in the US but the parts come from a myriad of companies around the world. Boeing spent painful years assembling this “masterpiece” of a supply chain. Facebook, Alphabet, Visa, McDonalds and Starbucks—many more could be cited — are simply global franchises. The global corporations are resented because in allocating resources where the majority gains there can be losers in this process. The losers resent being at the mercy of global economic and technological forces they cannot understand or control. These global forces do not respect Westphalian sovereignty, thus upsetting politicians. President Trump can decry globalization all day long but he is up against accelerating global technology which is unstoppable. He will be another King Canute if he spends his time trying. China in turn with its protectionist/mercantilist and information control measures, is only hurting China.
  1. Robotics and AI are going to change the world. Their abilities are improving, their cost is declining. American manufacturers will have less incentive to locate their plants in inconvenient cheap labor countries. Robotics is a global industry. For example, American Nvidia is teaming up with Japanese industrial robot manufacturer Fanuc to bring AI into Fanuc’s robots and America’s and the world’s automobile factories. Manufacturing is coming back to the US to highly robotized factories. Investors obviously will want to jump on the robotics bandwagon. Unfortunately for President Trump, robots don’t vote. Not yet anyway.
Bashing China with American Protectionism is Dumb