President Trump announced he will levy 10 percent tariffs on some $200 billion worth of Chinese goods. The tariff will take effect on September 24, and is slated to increase to 25 percent by year’s end. Of course, China pledged to retaliate with tariffs of “equal scale and equal strength.”
This has some American exporters worried. After all, China is the fourth-largest buyer of American goods. More importantly, the Middle Kingdom is the world’s largest untapped consumer market. China is El Dorado—were it only open for business.
GOP bigwigs agree, and are willing to fight the president tooth-and-nail in the name of “free trade” with China’s authoritarian dictatorship—an oxymoron if ever there was one. But what they fail to understand is that China will not embrace free trade because it conflicts with their modus operandi.
Instead of pursuing Chimaera, Congress should focus on rebuilding America’s hollow industrial base and maintaining our tenuous technological lead.
the birds & the bees—also bats
By 1970 Chinese civilization was near collapse. The “Middle Kingdom” was a peripheral backwater—a warzone populated by peasants who scratched their living with tools of bone and rock. Mao’s cult demanded they melt down their metal implements to build forages to boost steel production. Steel was a sign of progress, after all. Some 35 million died of starvation during the “Great Leap Forward” and millions more disappeared in the night. China lay in ruin.
Today, China is the land of one thousand cities. In the last decade they’ve poured more concrete than America poured in the last century. Their industrial production is triple America’s—their population over quadruple. Additionally, China’s computing power is nearing parity and their scientific output is gaining fast. No wonder economists describe China’s rise as an “economic miracle.”
How did they do it?
The standard explanation for China’s rise runs like this: in the 1970s China shied away from hard-nosed communism and began to liberalize. In 1985 China opened coastal cities like Dalian, Guangzhou, and Shanghai to development. As predicted, cheap Chinese labor attracted investors, who built innumerable, factories, roads, and ports. China industrialized because of its (economic) liberal reforms and freer trade with America. China’s rise is liberalism’s triumph.
This narrative is false. Remember, homologous structures don’t necessitate shared origins—just because bats, birds, and bugs all have wings doesn’t mean they evolved from a (recent) common ancestor. Likewise, although China’s economic reforms look “liberal” to western eyes, they stem from a different ideological substrate.
Modern Chinese capitalism is not rooted in Adam Smith or David Ricardo, instead its progenitors are the Qing Dynasty’s nameless mandarins.
The oldest definitive evidence of trade between China and the West dates from 1070 BC—a Chinese silk found in Pharaonic Egypt. Although we do not know the scale of this commerce, we do know that by 800 BC Chinese craftsmen created jewellery with imported gold, and decorated said jewellery with Scythian motifs. This implies that intercontinental trade was regular-enough to facilitate the diffusion of aesthetic tastes and artistic techniques.
Trade eventually coalesced along the silk road, an overland trade route crisscrossing Eurasia’s deserts and mountains. Because of the vast distances and physical limitations of pack animals, merchants only transported luxury items. For example, China exported silk and porcelain in exchange for amber, glass, and gold. This was the extent of East-West trade until 1522 AD, when Portuguese ships reached China.
Direct shipping greatly reduced prices and increased European demand for Chinese goods. But there was a problem: China didn’t want anything made in Europe. They only wanted silver. There are two reasons for this: first, many Chinese elites disdained “barbarian” merchandise; second, the Middle Kingdom’s most able mandarins saw European goods as a threat to Chinese industry. Thus, silver was the preferred—and eventually only—medium of exchange.
Nevertheless, trade grew rapidly. In the latter half of the 1500s Europeans exported 50 tons of silver to China annually. By 1650 silver-outflows increased to 115 tons annually. This trade enriched China by increasing demand for Chinese production and increasing monetary liquidity (silver was currency). However, the gains in Europe were ephemeral. On the one hand, they enjoyed luxurious Chinese silk. On the other, they only had so much silver.
Hungry for Chinese goods but low on silver, Britain started smuggling opium and cotton into the Middle Kingdom during the early nineteenth century. China cracked down and tensions boiled over in a conflict known as the First Opium War (1839-42). The British won, gaining Hong Kong and the right to export their manufacturing to China—they finally entered El Dorado.
Fearing that British imports would outcompete their domestic manufacturers, China soon rescinded the deal and banned British imports. This precipitated the Second Opium War (1856-60), wherein a British-led European coalition again defeated China, and opened the Empire to European merchants. Additionally, British goods were entirely exempt from taxes.
The flood of European industrial production choked-out Chinese competitors, and aborted all prospects of domestic industrialization. Slowly but surely, China was reduced into a state of mercantile dependency.
the second resurrection of Lazarus
For over a century China lay in economic ruin. Things began to change in 1971 when President Nixon lifted America’s embargo on China, which had been in place since Mao’s takeover. But trade remained insignificant until 1980 when President Carter conferred “most favored nation” status on China, thereby exempting them from the additional tariffs imposed on “hostile” states—apparently this communist dictatorship was no longer hostile.
In 1985 China opened a number of coastal regions including Dalian, Guangzhou, and Shanghai to foreign investment. The rest is history: American investors relocated innumerable factories to China and exported the production at “bargain basement” prices. Between 1985 and 2017 Americans bought a net $5.2 trillion worth of Chinese production—enough to capitalize the industrialization of earth’s largest nation.
Not only did China industrialize, it also modernized. American technology and science flowed into the Middle Kingdom after President Reagan reclassified China as an allied state, removing the usual restrictions imposed on technological exports. This benefited a number of America’s technology exporters, but it also gave China the keys to the Ferrari: not only was labor cheaper in China, but Chinese factories could be outfitted with the latest technology. We created a new competitor.
One of the main reasons that America’s leaders, from Reagan to Obama, have dealt with China so incompetently is that they misread the signals: they think China is emulating America, and thus they will eventually open their markets and trade freely. Every American concession is underpinned by this assumption. This assumption is false.
China isn’t emulating America, it’s emulating itself—a historical version of itself.
In 1985 Chinese opened its doors specifically to export-oriented industries. That is, companies that built factories in China with the express purpose of exporting the production were given generous subsidies and access to artificially cheap labor. From the beginning of its resurgence China’s goal was to be the seller, not the buyer—swap semiconductors for silk, or plastic for porcelain and you’ll see the similarity between the “communist” and Qing trade policy.
Another important congruence is how modern China jealously guards its lucrative domestic market. By and large, Western companies cannot operate in China. Those granted the privilege are often forced into “partnerships” with Chinese companies, which siphon-off a portion of the profits and serve as important vectors for intellectual property theft—which costs America some $400 billion annually.
China’s protectionism also allowed the nation to evolve an independent and hugely profitable economic ecosystem. Just look at China’s information technologies sector: by blocking Amazon, China preserved the market niche for a domestic competitor, Alibaba. Today, Alibaba is one of China’s most valuable companies, and is Amazon’s only viable global competitor. Modern Chinese bureaucrats, like their Qing predecessors, operate according to the simple maxim: China first.
When China “opened for business” in 1985 it was not emulating America, nor was it following the recommendations of free market economists: it was reviving the Canton System, it was embracing its mercantile past. China was becoming China again.
China was a mercantile power once, and it is a mercantile power again. And most importantly, it has no plans to become a liberal, free-trading nation—economists be damned. The late Deng Xiaoping, the architect of China’s economic resurrection, said this of China’s “economically illiterate” trade policy: “It doesn’t matter if a cat is black or white—if it catches mice, it’s a good cat.” Economists can say what they like, but make no mistake: China is one fat cat.