Senate Finance Subcommittee Issues Testimony From Open Markets Institute Fellow Baltzan
Those of us who remember the debate over whether
the pull of the liberal idea continues to be very strong as economic power devolves and the economy becomes more open to the outside world...
As discussed further below, it is global economic integration that has given the Chinese government the economic leverage over the rest of us to advance an illiberal agenda. Thus, rather than having global economic integration incubate democracy and suppress autocracy, global economic integration has become a vector for autocratic suppression of democracy. Economic liberalism did not lead to political liberalism: it has led to political repression.
There are various ways to address the threat the behavior the
More broadly, we must also reform the rules of globalization. The current reform proposals are woefully inadequate to address the scope of the problem. It is not clear that our allies yet share our concerns about the seriousness of threat. As a result, cooperation with allies alone is unlikely to suffice to address the problem, at least in the short-term.
Extraterritorial Suppression of Freedom of Speech
With increasing boldness, the CCP - the Chinese government - has used its considerable leverage over global markets to attack the right to freedom of expression. For Americans, the most notorious examples have involved the NBA and South Park.
When the CCP was "offended" by a South Park episode, the creators had a different response. They used the government's attitude to mock it - and the Morley critics. "We, too, love money more than freedom."6 Though the apology was satirical, it drove home the issue: by doing business with China, Americans are too often forced to choose between money and freedom. This choice is fundamentally inconsistent with the premise under which
Chinese efforts to control speech about
The Chinese government's extraterritorial control of speech is not limited to Americans, either. The Swedes gave a freedom of speech award to a Chinese-born Swedish publisher under detention in China.12 The Chinese government warned that
Chinese diplomats have also escalated their decidedly undiplomatic barbs.13 The double standard is jarring. Anyone commenting critically on the CCP's conduct is subject to accusations of "hurt feelings" and retaliation. In the meantime, Chinese diplomats insult other countries with increasing abandon.
The Chinese government's behavior takes on ever greater characteristics of the authoritarian heyday that Fukuyama believed was over.
Ironically, by concluding that the fall of the
How did this happen?
A Brief, Relevant History of the Negotiations to Create the GATT
Our appreciation of the true roots of the multilateral global trading system is a bit rusty. We have a vague notion that there were tariff wars in the 1930s, and that the architects of peace felt that a rules-based global trading system would promote harmony.
What we remember less is that the
The architects, which included
These rules did not survive. The received wisdom is that they failed because
Compare this more nuanced view to the one handed down over generations: it is not trade by itself that produces a social good, but trade as part of a system of free enterprise. And, critically, free enterprise was not synonymous with "laissez-faire," but rather with a suite of rules designed to impose restraint on the excesses of capital that, for example, led to the 1929 crash. That the system designed by the post-war architects was based on laissez-faire is unthinkable in light of the fact that Keynes himself repudiated such a system in 1926 with his essay The End of Laissez Faire.21 Keynes celebrated the American proposal, deeming it "the blue prints for long term commercial... policy" and "the first elaborate and comprehensive attempt to combine the advantages of freedom of commerce with safeguards against the disastrous consequences of a laissez-faire system."22 In describing the two paths that lay ahead, Clayton was referring to the
When China joined the
But it was not just the size of the market, or the cheapness of the labor that led to the rapid rise of China as an economic powerhouse after PNTR, shown in the graph below.24
The interventionist nature of the Chinese government also played a critical, and underappreciated, role. It is typical to ascribe the Chinese economy's rise to the simple operation of Ricardo's comparative advantage. However, in exploring how China has risen to the top of the lithium ion battery industry, the
If we examine the approach of the Chinese government to the global marketplace from a broader lens, we start to see the common thread across its behavior.
But
Many trade experts remain relatively unconcerned by the behavior of the Chinese government. According to this view, similar arguments were made about
The increasing aggression of the Chinese government illustrates the radical differences between the
By contrast, as its behavior in the
It is not only PPE, however. One review of the transcripts at the USTR Section 301 hearings reveals an extraordinary list of products that witnesses claimed could not be made outside of China.29 It is not simply that these goods cannot be made in
This situation is serious enough that it has gotten the attention of the Pentagon. In a report on the industrial base, the
Trade policymakers are now in the process of finding out what IT workers have known for decades: redundancy is critical.
Because of the size of the Chinese economy, its geopolitical ambitions, our extreme supply chain dependency, and the Chinese government's willingness to exert that power in ways inimical to the interests of democratic societies, the CCP poses a threat that is simply not analogous to Japanese economic ambitions in the 1980s.
Solutions
The CCP's leverage over the speech of American citizens comes in large part from its economic leverage over
Some of these approaches will involve coordinating with our allies, be it at the
We cannot afford to rely exclusively on collaboration with allies to address to threat the CCP now presents. It will take a mix of strategies.
The following priorities stand out, though these are by no means exhaustive:
* Promote redundancy in supply chains. Although there are mixed feelings about the Section 301 tariffs, one benefit is that they have been moving supply chains out of China, and to other countries.34 Among the countries benefiting are those with values more akin to our own, including
We must be more deliberate, however. For example, building on the Pentagon's efforts, we should examine supply chains and identify alternatives for those that are important to the
Although the concept of industrial policy was out of vogue for the past 40 years, there was a strong bipartisan consensus in favor of it in the 1970s. Supporters included
However, to ensure that we address the true scope of the problem, we must understand all the ways in which the trading system facilitates supply chain concentration in
* Negotiate comprehensive reforms to the rules of globalization to preserve competition. Even if we succeed in diversifying supply chains, it will be difficult to sustain that diversification unless the rules of globalization themselves are reformed. Otherwise, the same incentives that led to offshoring and concentration in the first place will lead to offshoring and concentration again. Therefore, reforms must address the fundamentally anticompetitive behaviors at the heart of the problem: monopolistic conduct, currency manipulation, and labor and environmental arbitrage.
To address monopolistic behavior, this paragraph from the Havana Charter is a useful starting point:
Each Member shall take appropriate measures and shall co-operate with the Organization to prevent, on the part of private or public commercial enterprises, business practices affecting international trade which restrain competition, limit access to markets, or foster monopolistic control, whenever such practices have harmful effects on the expansion of production or trade...40
These rules cover both private and public commercial enterprises and allow us to avoid the pointless debate over whether a particular company is state-owned or not.
The Havana Charter also had rules to guard against labor arbitrage. With respect to currency manipulation, the Charter set out a mechanism for dispute settlement that included fact-finding by the
* Rethink our asks of the CCP during the ongoing negotiations. Some of the priority asks of the CCP are at odds with the goal of reducing Chinese economic dominance and indeed would increase CCP leverage over us. For example, the Chinese government's lack of respect for intellectual property rights is one of the reasons companies choose not to produce there. By improving the investment climate in
We should instead use the talks to discuss labor and environmental arbitrage.41 It is not because labor and environmental issues are "social" issues, as has been the traditional perception. Rather, the Chinese government suppresses these rights in order to create a false comparative advantage, and that is bad for American workers and American businesses. Indeed, it is bad for every country in the world that has to compete with Chinese production of industrial goods. Part of the reason
This is reason enough to revive the Charter's rules on labor rights, and to expand them to include environmental rights, as part of the
The optimism that prevailed after the demise of the
Ironically, then, we are now living through the very outcome the founders of the system sought to prevent. If the Chinese government continues on its present path, which is to bend others to its will, we may well end up with a global trading system that more closely resembles state capitalism than free enterprise. The loss of free speech we are witnessing seems merely to be a harbinger of the loss of other freedoms, too.
We are not powerless to act, but it does require us to part company with the theories of trade that have predominated over the past 25 years. Trade does not produce peace by itself. Rather, trade fosters peace when the rules are designed to promote peace.
Fukuyama has more recently revisited his views. Commenting that the "unregulated markets" associated with Thatcherism had in many ways a "disastrous effect," he went on to comment that the only "plausible systemic rival to liberal democracy" is Chinese state capitalism.
The Chinese are arguing openly that {state capitalism} is a superior {model} because they can guarantee stability and economic growth over the long run that democracy can't.44
The system we thought would breed democracy has instead facilitated a rival ideology that threatens democracy itself. Fukuyama has the integrity - and the courage -- to revisit his assumptions, and to recognize his mistake.
We must do the same.
* * *
Footnotes:
1
2 Id. at 10.
3 CNN Business, "The NBA Faces a No-Win Situation in
4 CNN Business, "China Won't Show NBA Pre-Season Games as Backlash Over Hong Kong Tweet Grows,"
5 Id.
6
7
8
9
10
11 Id.
12 The Guardian, China Threatens Sweden after
13 The Straits Times, "Diplomatic Outbursts
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16
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18 Id., at 419.
19
20 "Why and How We Came to Find Ourselves at the
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24 Visual Capitalist, 70 Years of Economic Development and Policy in
25
26
27 Id.
28 Klein and Pettis, Trade Wars are Class Wars, at 121-22.
29
30
31 Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of
32 Id., at 36.
33 "China:
34
35 Creating Helpful Incentives to Produce Semiconductors for America Act (https://www.cornyn.senate.gov/node/5599)
36
37
38 Id., at 103, 250.
39 Market Economy Sourcing Act (https://www.casey.senate.gov/download/market-economy-sourcing-act)
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43 Fukuyama, "The End of History?" at 3.
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