Donald Trump

Telling the Truth on Trade With China

More government control over the U.S. economy will make the U.S. more like China.

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We hear quite a bit of misleading rhetoric against China these days. Let's grant, for argument's sake, that the Chinese overproduce steel, dump some of that steel into Canada and Europe before it makes its way to the United States, pilfer intellectual property and have a plan to dominate the world by 2025. It's still not a good reason to protect a few privileged American producers by slapping tariffs on the stuff other U.S. firms use to manufacture their goods—or for the government to restrict the supply of goods that households consume to raise their standard of living.

Since when do free market advocates believe that a communist authoritarian regime like the one in China can successfully and centrally plan and execute economic growth? These days, newspapers are full of quotes by noted free marketeers who would usually oppose trade barriers such as those put in place by the Trump administration but nevertheless support such barriers because they worry that China's 2025 "plan" will successfully lead to its domination of many industries.

It's puzzling. George Mason University economist Don Boudreaux correctly commented on this inconsistency by writing that those on the political right who usually believe in markets "correctly understand that the U.S. government cannot out-perform the market at 'picking' winners, but they … nevertheless believe that foreign governments, especially those governments with authoritarian histories and that currently possess authoritarian powers, are invested with uncanny abilities to improve the performance of their economies with subsidies, trade restraints, and industrial policies."

If these guys really believe that such a top-down government-controlled economy can work in China, why not try it here? And if it works so well in China, why doesn't it work in Venezuela or Cuba?

Also puzzling is the constant refrain about China producing more than it needs. Even if this overcapacity were a boon for China, it would still be to the benefit of millions of American consumers. It lowers costs for thousands of small U.S. manufacturers and steel consumers. But in reality, this "overproduction" is a tragedy for the Chinese people because their government's subsidization of steel production inevitably diverts resources from other areas of the Chinese economy. I don't hear Americans and Europeans complaining about all the stuff China isn't producing because its government stupidly wants to produce a lot of steel. So the next time you encounter someone lamenting China's overcapacity, shed a tear or two for the Chinese people and recognize that some American non-steel production might fall if (and when) Beijing stops diverting so many resources into Chinese steel factories.

"But what about American steel producers?!" some plead. If you think trade is the main culprit in the steel-industry woes, think again. For decades, Americans have imported between 25 and 30 percent of our steel. That leaves domestic steel with a healthy 70 to 75 percent of the market. To the extent that steel jobs were lost, the reason is that American steel executives implemented labor-saving innovations (read: technology) just like the rest of the manufacturing industries. These innovations made individual steel workers more productive and raised their wages. As a reminder, steel employment in the United States actually peaked in 1956, long before China entered in the picture.

"But the Chinese steal intellectual property from us!" others say. Still, the best way to protect the property rights of some Americans—many of whom freely choose to operate in China under these conditions—isn't to impose import taxes (tariffs) and thereby penalize millions of American consumers. Such "retaliation" by the U.S. government is a policy of picking winners and losers, which is unfair and inefficient. It also puts thousands of other American jobs in jeopardy, exposes us to retaliation and causes U.S. companies (like Harley-Davidson) to move their production abroad. The best solutions use international organizations to challenge China's actions and form alliances with like-minded allies.

I hope you won't read this piece as a defense of the Chinese regime. There's no excuse for the way it treats its people, abuses human rights and deprives the Chinese from free market economic policies. However, many of the arguments levied against China as they relate to trade either misidentify the true victims or advocate the wrong remedies. And let's not forget that new U.S. trade and investment restrictions won't make China more like us, but more government control over the U.S. economy will make us more like China.

NEXT: Assessing Justice Kennedy's Legacy

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  1. There’s no excuse for the way it treats its people, abuses human rights and deprives the Chinese from free market economic policies.

    Talk about not getting it. Making Americans pay high import taxes on Chinese goods will force China to change these policies because… um… because intentions!

  2. Can we have at least one article from Reason that acknowledges Trumps tariff war is a means to ELIMINATE them?

    1. Is this that 3d chess I hear so much about?

      1. Not even. He’s explicitly said and tweeted as much multiple times.

        1. Wait, I thought his authority in the matter was about National Security? Now you’re telling me that washing machines aren’t integral to the security interests of our nation?

        2. I’ve been told from many authorities that the content of his tweets don’t mean anything.

          1. They mean nothing, except when you want them to mean something. They’re like magic.

          2. He’s also discussed the subject multiple times in formal speeches. Look, feel free to disagree with his tactics all you want. But FFS, at least admit that it’s an integral part of his stated strategy .

            When you people talk idiotically like this, you sound just like progressives. Don’t do that.

        3. Oh, he said so! Well then, objections withdraw. The God-King has spoken!

        4. If he is serious about zero tariffs, why has he surrounded himself with protectionists like Peter Navarro and Wilbur Ross?

          Trump has been talking about the need for protectionism for over 30 years. Do you really believe he, Navarro and Ross had some kind of conversion last week?

          1. And Larry Kudlow?

    2. Yeah, because intentions are magic. The reality of a trade war is that it turns into a contest of which government can impose the most punishment on their citizens who want to purchase imported goods. The logical conclusion is governments putting an embargo on their own ports. Basically they declare war on themselves.

      1. Basically they declare war on themselves their own people.

        Minor nit. Something tells me the governments imposing the sanctions on their own people will be just fine.

  3. Reason wakes up real rowdy. I am not ready for these comments so early in the morning.

  4. Great article. Add to this: China is a lot more fragile than outward appearances suggest. God knows what financial disasters lurk beneath its verneer of state-directed “capitalism” or whatever it is they are doing over there. They also have a demographic time bomb, and as their population becomes more affluent, their expectations will rise, maybe not to full-throated “freedom”, but perhaps to something Singapore-lite.

    Some of this makes China MORE dangerous, militarily, as I think it likely they will pull a Falklands-type stunt with Taiwan at some point to bolster their political legitimacy.

    On the economic front however, all America needs to do is get out of our own goddamn way: regulation, government spending and tax-wise. If we got our own act together, we’d do well enough to not give two shits about China.

  5. George Mason University economist Don Boudreaux correctly commented on this inconsistency by writing that those on the political right who usually believe in markets “correctly understand that the U.S. government cannot out-perform the market at ‘picking’ winners, but they … nevertheless believe that foreign governments, especially those governments with authoritarian histories and that currently possess authoritarian powers, are invested with uncanny abilities to improve the performance of their economies with subsidies, trade restraints, and industrial policies.”

    No, they don’t believe government is bad at picking winners and losers, they believe the losers we’ve been dumb enough to put in charge are bad at picking winners and losers. Sad!

    But now we have Trump, the most successful dealmaker in the history of the world making America great again like it’s never been before, so now you’ll see how having the right Top Men in charge means central planning will beat the free market every time.

    Think about it – the free market means businesses respond to every moron waving a nickel, giving them what they want rather than what smart people know they should want, and our Lord and Savior Donald J. Trump is much smarter than all those other smart guys put together. Put your faith in the Lord and He shall deliver you from the depths. You start talking shit about our God and we’ll nail your ass to a tree.

  6. Since when do free market advocates believe that a communist authoritarian regime like the one in China can successfully and centrally plan and execute economic growth?

    Because their “2025 plan” is a 7 year plan instead of the usual 5 year plan? That was the secret to successful central planning all this time: an additional 2 years. /sarc

  7. If these guys really believe that such a top-down government-controlled economy can work in China, why not try it here?

    Let’s not give them any ideas.

    And if it works so well in China, why doesn’t it work in Venezuela or Cuba?

    Because Asians are really smart whereas dirty beaners aren’t? /sarc

    I hope you won’t read this piece as a defense of the Chinese regime.

    Oh please, everyone knows you’re the biggest pinko Chi-com apologist at (t)reason. /also sarc

  8. Use the tariff money to offset environmental and other regulatory schemes and to lower personal income tax and I would be cool with that. I think that only deep pocket corporations should band together to fight taxes and us civilians should live our lives without contact with the IRS. The manufacturers try to pass on the cost of taxation to the consumer, but there are limits and competition. Crony Capitalists should be drawn and quartered.

    1. Eventually there’s enough pressure, through resistance to high prices, that it’s cheaper for a corporation to fight it in court rather than lose profits.

  9. The article misses the biggest point in trade with China…their currency the Yuan. Until the Yuan is freely traded in global currency markets there will not be FREE or even FAIR trade with China. By omitting the Yuan or addressing China’s barriers into entering their markets the article seems biased towards the China side.

    1. Japan is/was worse. I think Japan just got its first Costco, after decades of jurisprudence.

  10. those on the political right who usually believe in markets “correctly understand that the U.S. government cannot out-perform the market at ‘picking’ winners, but they … nevertheless believe that foreign governments, especially those governments with authoritarian histories and that currently possess authoritarian powers, are invested with uncanny abilities to improve the performance of their economies with subsidies, trade restraints, and industrial policies.

    No, that’s not the argument at all. On average, Chinese steel dumping does not “improve the performance” of the Chinese economy as a whole. That is, China’s trade policy is a negative sum game: it hurts their economy and it hurts ours.

    If China were a rational participant in a free market, they would stop doing it or go out of business. But they are a communist dictatorship and they aren’t optimizing economic performance, they are optimizing for political power, and from that point of view, their policies make sense.

    It is utterly absurd for free market economists to reason about China as if the entire country were a profit-maximizing economic agent.

    1. Yup. People forget that POLITICAL and/or MILITARY power is as important, or more important, than simple dollars and cents. China is trying to maximize their political and military power, if that results in mildly less economic growth they’re fine with that. Knee capping foreign industries, while building their up in key sectors, is seen as a worthwhile goal to them. Frankly I can’t entirely argue with their logic either. Their economic growth is so robust they can afford to shave a percent or two of economic growth a year to achieve geopolitical goals they might not with a totally free market. They’re playing power politics, not just economics. In other words they’re playing an entirely different game than the free(ish) market western world is, and authors like this completely miss the point and think it doesn’t make sense… But they don’t have the same goal in mind, and it makes perfect sense if you know what they’re really after.

  11. There is much right in this article, but as usual some minor deceptions.

    The reason the USA still supposedly produces 70% of the steel we consume, while our production has cratered to less than half what it was not too many years back is very simple… We no longer have most of the steel consuming industry here anymore either!

    We’re importing tons of steel in finished form from abroad, otherwise our production as a percentage of consumption would probably be something paltry like 10-20%. If you import a pot from China made of steel that isn’t counted as “steel consumption.” My vintage Revere Ware pots were made in the USA, so would have counted, the Chinese made ones now don’t. No domestic manufacturing = on paper lower consumption. So the way it’s framed here like we’re still cranking out as much as we need is a little disingenuous.

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