Why Trade With China Is Skewed

In an op-ed in the Wall Street Journal Peter Navarro explains why international trade with China cannot work as the notionally free traders think it should:

Why is the textbook model failing? The answer is that China’s faux comparative advantage is the result of its state-directed investments, nonmarket economy, and disregard for the rule of law.

The problem’s taproot is Chinese intellectual-property theft and the forced transfer of foreign technology as a condition of accessing China’s market. These illicit practices, including widespread cyberespionage, allow Chinese companies to move rapidly up the innovation curve at much lower cost than their foreign competitors, which must recoup the cost of research and development through higher prices.

Other forms of economic aggression contribute to China’s faux comparative advantage. To protect its market, China erects high tariff barriers—e.g., its auto tariff is 10 times that of the U.S. China has high nontariff barriers, too, including intrusive licensing requirements and foreign-ownership restrictions that keep the playing field tilted in favor of Chinese companies.

To gain global market share, China showers its state-owned and state-financed enterprises with subsidized land and capital, myriad export subsidies, and lucrative tax preferences. To prevent the adjustments predicted by the textbook model of trade, China has historically undervalued its currency.

Most broadly, China’s “going out” strategy involves leveraging sovereign-wealth funds to capture the industries of the future. Three of the world’s 10-largest SWFs are from China, and China Investment Corp. has close to $1 trillion. These funds regularly scour technology-rich communities like Silicon Valley, Boston and Austin, Texas, seeking to purchase the crown jewels of American innovation. Since its founding in 2009, for example, Sinovation has accumulated $1.2 billion in total capital and has invested in almost 300 startups.

Those are all arguments I made against granting China Most Favored Nation trading status, why I opposed its admission to the World Trade Organization, and why the U. S. runs such a large trade deficit with China. To them I would add China’s lack of a robust system of civil law which means that U. S. companies suing the Chinese partners that were foisted on them as the price of entry into the Chinese market do not do so on a level playing field. It is inevitably tilted towards those partners, many of them Chinese officials or their family members.

Millions of ordinary Americans have been injured by our feckless policy as jobs disappeared. A relative handful, like the Walton family and major shareholders in Apple, have become fabulously wealthy.

Americans aren’t the only ones who have been injured. Every individual living in a country with a developing economy has been injured as China’s mercantilism retarded the development of their countries.

The question now is how to remediate what those feckless policies have wrought. It won’t be easy or painless but the entire world will be better off for it.

6 comments… add one
  • steve Link

    “The problem’s taproot is Chinese intellectual-property theft and the forced transfer of foreign technology as a condition of accessing China’s market.”

    Forced? No one forced companies to go to China. They willingly gave up their technology. They knew China was going to take it. However, it made a lot of money for key management people in the short run. Now we are going to make sure we don’t even tax that money.


  • It bears considering that although such requirements may not be “forced” they violate international accords to which China is a party.

  • Andy Link

    I’ve been reading some posts on this blog recently – as a non-business, non-lawyer guy, it seems very complicated:


  • What makes it even more complicated is that enforcement may be selective.

  • Andy Link

    Definitely! I think I mentioned before that a member of my extended family is an executive in the casting additives business. They are pulling out of China because they’ve seen Chinese environmental regulations selective applied to them and not state-owned/Chinese competitors.

  • Environmental regulations are a case in point. Basically, they’re a press release unless you’re a foreign company.

    Labor regulations and health and safety regulations are that way as well. China looks fantastic on paper. As Yogi Berra said, in theory there’s no difference between theory and practice; in practice there is.

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