The spat has spread beyond the White House and President Donald Trump. At the New Economy Forum held in Singapore in November, Henry Paulson, the former head of Goldman Sachs and treasury secretary under President George W. Bush, warned that a “new economic iron curtain" is falling between China and the US. Meanwhile, Wang Qishan, vice president of China, claimed that the “polarization of right-leaning populism" in the West was stoking anger and destabilizing the global order.
The Trump administration contends that China persistently flouts the spirit, and sometimes the letter, of WTO rules. There is truth to these allegations. But what lies behind such accusations is the administration’s inchoate sense that China is on the verge of challenging America’s economic, technological and even military dominance, a status that has been unchallenged since the end of the Cold War.
The conventional view is that free flows of international trade and investment, as well as ideas and even ideals, enhances well-being for all nations that sign on. This view is deeply grounded in economic theory and is at the core of the post-war global order and the institutions that govern it — what political scientist John Ruggie has termed “embedded liberalism".
The contrary view is that, in practice, nationalistic power can ride roughshod over free trade and investment. Trumpian isolationism, though intellectually incoherent and confused, seems to be saying that a powerful country like the US can and should bully other less powerful countries into tilting their terms of trade against themselves and in favour of
the US. To be fair, this is not entirely new with Trump. As long ago as the 1990s, economist Jagdish Bhagwati coined the concept of the “diminished giant syndrome" to explain the US tilt away from multilateralism toward preferential trade agreements which could be stacked in favour of the US.
The charge that China has, since its opening up in the 1980s, extracted greater gains from trade with the US than vice versa is suspect. The US—indeed, the whole world—has benefited enormously from China’s exports of an ever more diverse variety of products that are less expensive than ever in human history.
This boon to the world’s consumers was initially due to cheap labour, but is increasingly due to mass production and cutting-edge technology, usually borrowed, but occasionally stolen. But the world’s producers have benefited as well, having greatly leveraged their technology, design and brand names by outsourcing labour-intensive assembly to China, thus handsomely enhancing their profit margins. Apple is a prime example: its products are assembled in China but designed in the US, which reaps most of the gain.
The Trump administration is threatening to raise its existing 10% tariffs on Chinese imports to 25% by January unless China makes major concessions. China has signalled clearly that it will not be browbeaten. It is not constrained by the niceties of Western-style democracy from dipping into its deep pockets to hold out in a trade war with Trump.
It is surely ironic that policies designed to “Make America Great Again" are very likely to backfire and accelerate American decline, by choking off the very gains from free trade and investment that helped create and sustain American hegemony in the first place.
To heighten the irony, America’s gains from trade with a future China, if managed cooperatively rather than adversarially, could well exceed its past gains. Empirical studies show that intra-industry trade between advanced economies yields higher mutual gains than that between developed and less developed economies. In other words, trade between America and an ever more prosperous China could yield greater gains, not lesser.
In fact, China’s output of basic scientific research is now greater than America’s, at least as measured by publications in leading academic journals. Tsinghua University’s output rivals MIT’s. This measure, imperfect as it is, likely foreshadows commercial and military technology that may soon challenge America’s.
Paranoid nationalists may worry that this foretells harm to the US. Yet as China advances toward world-class output in STEM (science, technology, engineering, and mathematics) research, there will be far more for the US to gain by cooperating rather than complaining and coercing. The smart American choice would be to step back from a tariff and arms race with China that would damage both economies as well as dissipate the attendant gains from trade and investment between them.
The wise course for the US is not to try to take on China as a foe, but rather to intertwine Western and Asian self-interest by harnessing free trade in goods, capital and ideas. That is the right route to “Making America Great Again".
James W. Dean is emeritus professor of economics at Simon Fraser University in Vancouver, Canada. Vivek Dehejia is resident senior fellow at IDFC Institute in Mumbai and a Mint columnist.
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