China and the US Contradict Each Other on Trade

“Pursuing protectionism is like locking oneself in a dark room,” said China’s President Xi Jinping at the World Economic Forum in Davos. “Wind and rain may be kept outside, but so is light and air.” Is China the new global champion of free-trade?

Xi’s words of warning were directed at the new American President Donald Trump. Meanwhile in Washington, the president backed the world’s largest economy out of the Trans-Pacific Partnership TPP, cancelled its transatlantic counterpart and imposed new tariffs on imports of industrial goods. Why does Communist China prefer free trade and the capitalist USA splurge in protectionism?

First, China is less communist that it wants to be. And it is less inclined to open borders than Xi makes believe. Then again, the US is less capitalist than it styles itself. And even Trump is open to overseas commerce under the right circumstances. How does all this play out?

China: Politics First

China’s approach to trade is best described as mercantilism. This was a form of economic nationalism that emerged in Europe around 1500 CE. The idea is simple: government allows for some economic freedom within the borders of a country. However, it pushes and regulates exports and curbs imports. The more it exports, the more money it accumulates and the more power it has – goes the theory.

A closer look at China’s policies today indicates that it is not far from mercantilism. It allows for much economic freedom within its domestic markets. But it has a set of “strategic industries” – for example armaments, pharma, banking – that are ring-fenced by regulation. This regulation makes it almost impossible for foreigners to supply, invest or acquire any stake in them. Also, the large network of state-owned enterprises operates on different grounds – and with different subsidies as well as political steering – than any other economic agent.

China might allow for imports and even push free-trade agreements with different countries. But at the same time that the Middle Kingdom discontinues customs-bureaucracies and lowers tariffs, it increases other types of anti-trade regulation. Examples are local-level controls, labelling directives or ever-changing safety regulations. As a result, China has had 35 complaints filed against it at the World Trade Organization over unfair trade practices since 2001, behind only the European Union.

China’s case for free-trade isn’t based on Beijing acknowledging any inherent merits of open borders. It is because free-trade brings economic and political power to the Middle Kingdom. As long as China is the exporter and maneuvers its internal markets against foreign produce, it is pro-free-trade.

USA: Jobs first

The USA has a nominal commitment to free-trade. It is in its charter, in its history and even in its Constitution. Still, pure free-trade never really substantiated in the reality of the US, let alone in its government’s policies. Even early Presidents and committed free-traders – at least in their theoretical writings – like James Madison, switched to job-creating policies once they were confronted with the trade-offs of reality. The predominant theme in US politics was and is: How do government actions create jobs.

With this fixation on jobs, the US is best described as a Keynesian system. Keynesianism puts job-creation at the center of all economic interest and evaluates everything else – including free-trade – in its light. The problems with this approach are: on theoretical level, there is nothing in economics that explains why jobs should be considered more central than consumption, innovation, wellbeing and many other things; more importantly and on a practical level, jobs-centrism leads to an extremely short-term view of things.

The actual US President is acting on jobs. His view on policies seems to be: whatever creates one job today is better than the alternative. Regardless of what the alternative is. But there is also good news for free-trade. According to that same logic, once a free-trade policy creates domestic jobs in the USA, Mr. Trump will probably be the first one to endorse it.

Who, now, is the real champion of free trade, the US or China? The answer is, none. Both are champions of their own interests. Free trade is only interesting to them if it serves these interests. But after all, that should be no surprise.

Henrique Schneider is chief economist of the Swiss Federation of Small and Medium Enterprises. He can be reached at hschneider@gmx.ch