Mrs May mustn't be naive about China; this is the most protectionist economy on the planet
What does Theresa May hope to achieve from her trade mission to China? As ever with Mrs May, it is not entirely clear.
There will certainly be contracts aplenty, some of them possibly genuinely new ones, as well as the familiar fodder of recycled old ones; this is always part of the publicity seeking furniture of such visits.
But at a time when the US President, Donald Trump, has vowed to get tough on trade with China, what’s her overarching purpose here? Does she back Trump’s complaint, or is she merely on the scrounge for potential Chinese windfalls from Trump's impertinence?
Her predecessor, David Cameron, started off badly with China; rather than focus on trade, he chose to highlight China’s shameful record on human rights, and then, horror of horrors, he rubbed salt into the wounds by agreeing to meet the Dalai Lama.
The Chinese leadership’s fury could be heard all the way from Beijing. The subsequent grinding of gears as the UK Government’s approach was put violently, and humiliatingly, into reverse, was almost deafening. There would be no more meetings with Tibet’s spiritual leader.
The next several years were to be defined by a great “kowtow”. Goodies and plaudits were showered on Beijing as if no country were as important to our economic future as China. We would trade the Renminbi in the City, support China’s efforts to set up an Asian alternative to the World Bank and International Monetary Fund, and we would cede the future of our nuclear energy industry to state controlled Chinese suppliers. A new “golden age” in relations between the two countries was declared.
Yet the payback from all this atonement has been far from obvious. Yes, our exports to China have grown strongly, but so have everyone else’s, and compared to other major economies, they remain quite small.
As far as I’m concerned, all trade is capable of economic good, even when it results in a deficit. My faith springs from the classical, English economists, Adam Smith and David Ricardo, and the law of “comparative advantage”. Once described as one of the most counter-intuitive ideas in economics, the concept holds that if someone else can produce things more cheaply and efficiently than you can, you are better off buying these things from them and focusing on stuff you are good at.
Trump’s gripe with the Chinese is that they are not in fact better at the things they sell to America, but abuse the rules of the game to engage in mercantalist practice and unfair trade.
His assault on the established norms of trade is multi-faceted. He’s attacking specific Chinese imports with tariffs, he’s interfering with the mechanics of the World Trade Organisation by blocking key appointments, he’s pulling out of newly negotiated free trade agreements such as the Trans Pacific Partnership, and he is threatening to kill off the long standing North Atlantic Free Trade Association. For the time being, his threats are more bluster than substance, but his message is clear; free trade by all means, but it must also be fair trade.
With China in particular, his complaint is more than justified. This is a country that talks free trade, and has grown increasingly rich and powerful on its bounty, but practices something different. Currency manipulation to gain competitive advantage? Guilty as charged. State subsidy and a planned economy that in key sectors is entirely free of usual market disciplines? Guilty. Tariff and non tariff barriers to trade? The European Union doesn’t come anywhere close. Intellectual property rights? Forget it. They are stolen with impunity. Media, old and new? No access whatsoever. I could go on.
There will be much talk in Beijing this week of China’s “One Belt, One Road” plan to revitalise ancient trading routes, with its promise of $1 trillion of infrastructure spending, but what honestly is the purpose of this ambition? Very simple; it’s about extending Chinese commercial power and political influence. As I say, all trade is good, but use of trade for imperialist ends is as old as trade itself.
I’m not arguing here that Trump’s tough cop approach to China is necessarily the right one. Gentle persuasion through existing, international rules based frameworks may in time yield better outcomes. And it is in any case much easier for the US, the world’s largest economy, to stand up to Beijing than it is for Britain, with its comparatively small and very open economy.
But there is no doubt that things have to change. Today’s international trading system was built for a bygone age of largely equal Western economies. It has not coped well with the arrival of billions of souls from the developing world. Globalisation has proved a boon for them, lifting hundreds of millions out of poverty, but it’s advantages to the West are far less obvious.
For many, it has looked like a one way street, an immense transfer from us to them of technology, jobs and wealth. In the early stages of Chinese development, there may well have been an altruistic and geopolitical case for such assistance, similar to that provided seventy years ago by the Marshall Plan to a war ravaged Europe.
But that time has long gone. Countries that plan to send manned missions to Mars no longer require a helping hand. The playing field must once again be leveled.
Forget China, globalisation, and trade, it is often said. They are not responsible for the Western malaise in living standards. Rather, it is the advance of machines and technology.
As brilliantly demonstrated by the economists David Autor, David Dorn and Gordon Hanson in their paper, The China Shock, this is only partially true. Alongside the much heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences, they found. “Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences”. As China moves up the value chain, these effects threaten to shift beyond already affected basic industries into the wider economy.
I do hope Mrs May is listening as she begs bangles from China to substitute for the ties of the European Union. All trade is ultimately beneficial, but when it is neither free nor fair, it can also be destructive.
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