Solving the China Trade Problem

President Trump is right to confront China on the trade issue.  China has long been dumping materials such as steel on the American market, and it has been acquiring technology we have developed by means open and surreptitious.  Together, China’s predatory trade policies have devastated American manufacturing and largely destroyed our blue collar middle class.  Here in Cleveland we have seen whole factories bought by Chinese, torn down, and re-erected in China.  What were good-paying American jobs became Chinese jobs.

At the same time, America needs China at the grand strategic level.  To meet the threat posed by Fourth Generation war, we need an alliance of all states.  The core of such an alliance must be the three greatest powers, Russia, China, and the U.S.

Nor should we wish to damage China’s economy.  The world is teetering on the edge of a global debt crisis.  Such a crisis is most likely to begin in China, whose recent prosperity is built on a $15 trillion mountain of debt, much of it bad.  A debt crisis in China will quickly spread.  It is likely to end in a world-wide depression to rival that of the 1930s.  America, which like China continues to pile up both public and private debt, will not be exempt.  America tomorrow will be Greece today, with the added nightmare of hyperinflation as the federal government seeks to pay off its debts with worthless money.  That is a future we should do our utmost to avoid. 

I think there is a way out of this seeming dilemma.  What is it?  Managed trade.

Managed trade is where two countries sit down and negotiate in detail what each will export to the other and import from the other.  The objective is a trade balance, where neither runs a large and continuing trade surplus with the other, as China now does with us.  Each country will have natural advantages over the other in certain products.  The objective is to balance the advantages of each with the comparative weaknesses of each.

Managed trade is possible with China because China has a state-controlled economy.  China’s economy today is neither Marxist nor socialist.  Instead, it is mercantilist.  Mercantilism is the economic model followed by Japan, then South Korea, and now China in transforming themselves from poor countries into prosperous ones.  Though ideological free traders loath the fact, mercantilism works.

Mercantilism was the predominant economic model in 17th and 18th century Europe.  For the most part, it relies on a regulated free market domestically.  But the state intervenes in the economy in order to promote its objectives.  Those objectives include full employment; the ability to meet most if not all needs domestically, which leads the state to finance industrial development aimed at import substitution; the use of tariffs, quotas, and other restraints on trade, again to promote domestic manufactures; and a positive balance of trade.

While free trade has benefitted Wall Street, it has done massive damage to Main Street.  One of America’s proudest achievements, a large blue collared middle class, is now largely gone as a consequence of free trade.  The white collar middle class’s neck is now on the block as companies seek to cut their cost by importing white collar workers from places such as India and outsourcing white collared jobs overseas.  A mercantilist federal government would stop both practices by denying visas to foreign workers coming here to displace Americans and by putting a large export duty on jobs shipped overseas.

Mercantilism on China’s part makes a deal based on managed trade possible.  Mercantilism here at home, instead of free trade, could rebuild the American economy we had in the 1950s and ‘60s, where prosperity was not limited to the 1%.