4 min read.Updated: 30 Jun 2020, 12:28 PM ISTShashwat Alok,Aditya Kuvalekar
China is accused of repeatedly using its techniques to target international corporations. From allegations of theft of biotechnology research to serious thefts of intellectual property in high-end electronics, there are claims it engages in activities of economic warfare
Amid the covid-19 induced economic lockdowns, there is an increasing chorus around the world to increase self-reliance in sectors critical to a nation's sovereignty and integrity. Many commentators have raised concerns, particularly regarding their nation's over-dependence on China. At the same time, free-market pundits have been crying hoarse on why this rising protectionism goes against the tenets of free trade and is likely to harm the very consumers it seeks to protect. Much of China's rise has been fueled on benefitting from the paradigm of "free-trade being good for humanity"—a narrative that has rarely been questioned.
While both of us are firm believers in the power of both free-market and free trade, we emphasize that no one should espouse any type of discrimination against China and its people—many of whom are extraordinarily talented, hard-working and entrepreneurial. We want to argue here that the entire premise on which free-trade is beneficial fails when thinking about trade with China. It is neither free nor trade.
Let us start with Make in China 2025 - China's very own 'atma-nirbharta' ambitions. The plan envisages that China achieves self-sufficiency in high-tech industries by 2025 with the aim of dominating global supply chains by 2049. The country plans to support its vision by providing more subsidies, tax breaks, and low-cost capital financing to its manufacturers. Such government-sponsored subsidy serves to give an unfair advantage to Chinese firms by allowing them to potentially produce and sell below costs. The idea is akin to creating a monopoly by driving out non-Chinese businesses through predatory pricing. Indeed, in the short-run, some firms and possibly many consumers can profit from this. Low production costs in China enable manufacturers to sell their goods for lower prices, thereby benefitting consumers. But, it also gives the Chinese firms a monopoly power once the domestic producers are driven out of the market. Once they start exercising monopoly power, it is far from evident that the consumers are better off. In the long run, consumers stand to lose not just the "consumer surplus" but also their means of employment.
Most countries have some version of a competition regulator that seeks to protect business and consumer interests by precluding the nations' firms from becoming monopolies. The idea of increasing import tariffs by the US or Indian government on Chinese goods merely serves to provide a fair and competitive environment to its own firms. Indeed, in a 2003 study, "Consensus Among Economists: Revisited," Fuller and Geide-Stevenson report that 71% of economists surveyed agreed with the statement that "Antitrust laws should be enforced vigorously to reduce monopoly power from its current level." The same reasoning is applicable to free trade as well.
Another vital consideration for free trade to exist is an environment of trust and transparency. For instance, in a 2013 paper, "War Signals: A Theory of Trade, Trust, and Conflict," authors Rohner, Thoenig, and Zilibotti argue that "Trade hinges on trust and cooperation. The onset of conflict signals that the aggressor has a low propensity to cooperate, harming future trust and trade." It is becoming increasingly clear that the line between the policies of the state and those of the Chinese corporations is often blurred and marred by frequent breach of trust. As Mike Giglio, a writer at The Atlantic, argues, a critical difference between the US and China is their approach towards economic espionage.
American intelligence agencies do not target foreign companies and steal their trade secrets to benefit their domestic firms. China, on the other hand, is accused of repeatedly using all its techniques to target international corporations. From allegations of theft of biotechnology research to serious thefts of intellectual property in high-end electronics, there are claims that unlike the other firms, the CCP engages in activities of economic warfare. While these seem to be mere allegations, the repeated nature of such issues spanning across geographies does raise concerns.
In short, neither is trade with China trade, nor is it free given the threats such as the ones pointed above.
Finally, we cannot forget that Britishers came to India as traders. In the 1730s, Chhatrapati Shahu Maharaj had written to Bajirao-I, that the Britishers are in India solely for trade, they honor their word and have always maintained good relations with the Marathas. Therefore, he recommended maintaining a friendly relationship with the British. 88 years later, the British defeated the Marathas to rule over the entire country in 1818. While the British did not arrive in India with a grand plan of ruling the country, yet they eventually did. With this knowledge of history, if one could go back in time, would one stand for free trade with the British at the time?
(Shashwat Alok is a faculty of Finance at the Indian School of Business and Research Director (DIRI), and Aditya Kuvalekar is a faculty of Economics at the Universidad Carlos III de Madrid. The views expressed are their own and do not reflect the opinions of their respective institutions.)
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