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America’s original trade policy toward China failed. That’s about to change

Written By | Apr 29, 2020
trade policy, China

Cartoon by Branco. Reproduced with permission and by arrangement with Comically Incorrect. (See link below original article)*

WASHINGTON — In February 1972, President Richard M. Nixon traveled to China in an attempt to normalize relations between the two countries. Nixon reasoned that improved trade between the two nations would stabilize the relationship, leading to mutually beneficial actions while avoiding future conflicts. Today, we see that Nixon’s optimistic line of reasoning ignored reality. America’s original trade policy toward Communist China simply isn’t working today. So let’s change the way this relationship works.

The idea behind America’s original trade policy toward China

Nixon reasoned that if China became a trading partner with the US, that nation would be less likely to enter into a conflict with this country. The reasoning was that if China relied on US markets to purchase a large portion of their output, they would not want to “bite the hand that feeds them.”  In addition, if China was purchasing large amounts of food from the US to feed its citizens, their government would not want to disrupt that supply.

Economic co-dependency should mean less hostility.

If countries become economically co-dependent on one other, there is far less of a chance that conflicts will arise. This was essentially the philosophy adopted by the United States after waging and winning World War II against the dictatorships in charge of Japan and Germany. To an astonishing extent, the US helped rebuild both former enemies after the war, and began trading with them extensively, particularly with Japan. As Japan’s economy grew, mostly by exporting to the US, Japan became a natural US ally. So did Germany.

Fast forward to a new century

In 2001, the People’s Republic of China was allowed to enter the World Trade Organization (WTO). Better yet for the Chinese government, the Chinese were granted most favored nation status. This significant status boost conveys considerable economic benefits to new and developing nations and their economies. Perhaps most importantly, the US supported this move. Once again, this nation did so in the hope hope that stronger economic ties with China would lead to stronger and far less hostile relationships and a more productive two-way trade policy. The US and the community nations clearly viewed this step as at least partially analagous to the way nations treated the nations of Japan and Germany after the Second World War.




Even though China’s new most favored nation status did not involve a formal trade agreement, the US and other governments encouraged trade with China nonetheless. The evolving trade activities with that country implicitly involved something resembling a free trade regime. In other words, the US and other nations assumed that trade with China would be free and fair. Unfortunately, the fair part never materialized when it came to the Chinese government. Every US president, up to the beginning of the Trump administration, allowed China’s unfair trade practices to continue unabated.

Consequences of lopsided trading arrangements

In the automobile industry, we charged China a 2.5% tariff on cars produced there and sold in the US. China charged a 25% tariff on cars made in the US and sold in China.  This imbalance resulted in China purchasing few of our cars, so not much of their money flowed into the US.

The US purchased many cars made in China. But this meant our dollars flowed out of our own country and into China. The unfortunate result evolved into a huge negative balance of trade that distinctively favored China. That negative balance of trade reached a peak in 2018 of over $400 billion. This situation simply could not go on.


Also Read: Re-opening America: President Trump’s next big decision

Low wage rates attract US companies to China

American companies were initially drawn to China because its labor force is industrious and highly productive.Early in the US-China trading relationship, the Chinese wage rate was more than 90% lower than the US wage rate. Consequently, much of US manufacturing quickly departed the US in favor of China.  But unfortunately, for both the country and America’s workers, the relationship envisioned by ongoing US administrations and their trade policy analysts didn’t exactly work as planned.

As more production moved to China, including the production of many much-needed medicines, both the US government and its citizens gradually realized that the trade situation with China had changed dramatically. And for the worse. We discovered we had become dependent on a country that did not behave the way a true international trading partner should.  Unlike Japan and Germany, China became hostile, very secretive and one-sided in their dealings with the US and with other nations as well.

American trade policy and industrial innovation can help address the US-China trade imbalance

Today we realize that the US has become far too dependent on China for far too many resources and goods. But now, as one result of the Covid-19 pandemic, many US manufacturers will stop producing in China and start producing in the US once again. Other companies may look to countries like Vietnam or Thailand as well.

The manufacturing that returns to the US still must produce goods at costs that are not too much higher than Chinese production costs. Reclaiming the old American tradition of constant innovation would certainly help in this regard. But if they can’t answer the challenge, consumers may once again resist the higher prices of domestically produced goods.

The only way to compete with China’s low wage-base likely means replacing most higher cost labor-intensive manufacturing tasks with lower cost capital-intensive manufacturing solutions.

Traditional American trade policy toward China will replace workers with robots

Such solutions means we must begin to intensify the use of robots, artificial intelligence and automation in America’s new or newly revived factories.

Today, companies hire 100 manufacturing workers to run older, less-reliable factory equipment. New factories may produce the same quantities of goods by employing 10 workers and 90 un-salaried robots. That should help keep manufacturing costs down.



Fortunately, when Congress cut tax rates in 2018, they finally cut rates for middle class workers to stimulate marketplace demand. But the GOP tax cut also slashed tax rates for high-income earners and corporations as well. All these cuts amounted to new capital that companies can put to work building newer, more efficient and mechanized factories.

The effects of Covid-19 are currently devasting to America’s workers and economy. But we can already see at least one positive result coming out of this pandemic. We all know now that we must change our relationship with China. President Trump initiated this transition after taking office in 2016. The coronavirus pandemic has only served to accelerate the momentum of this change. In the future, the US will cease depending on China for vital products we can produce here or elsewhere.

Conclusion

This dramatic change in diplomatic and trade policy will be good, both for the US and for its citizens.

— Headline image:  Cartoon by Branco. Reproduced with permission and by arrangement with Comically Incorrect.

Michael Busler

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.