“Pursuing protectionism is like locking oneself in a dark room,” said China’s President Xi Jinping. “Wind and rain may be kept outside, but so is light and air.” Mr. Xi’s words of warning were directed at the new president of the United States. Meanwhile in Washington, Donald Trump erected new barriers to free trade. Why does Communist China seem to embrace free trade while the capitalist U.S. resorts to protectionism?
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The answer is simple. In both countries trade, or its absence, is just an instrument of politics.
China’s approach to trade is best described as mercantilism. Its government allows for some economic freedom within its borders. However, it pushes and regulates exports and curbs imports. The more the country exports, the more money it accumulates and the more power it has.
China does allow for some internal trade. But it has a set of “strategic industries” that are ring-fenced by regulation. This regulation makes it almost impossible for foreigners to supply, invest or acquire any stake in them. Also, a large network of state-owned enterprises operates independently from China’s free-trading commitments.
As long as China is the exporter and can rig its internal markets against foreign goods, it will argue for free trade
China might allow for imports and even strive for free-trade pacts with different countries. But as the Middle Kingdom discontinues customs bureaucracies and lowers tariffs, it increases other types of anti-trade regulation. Examples are local-level controls, labeling directives or ever-changing safety regulations.
China’s case for free trade is utilitarian. Beijing champions free trade because it brings China economic and political power. As long as the Middle Kingdom is the exporter and can rig its internal markets against foreign goods, it will argue for free trade.
The U.S., on the other hand, has a nominal commitment to free trade. Still, the rhetoric never has led to pure free-trade practice in that country. Even early presidents and committed free traders, such as James Madison, switched to job-creating policies once they were confronted with the reality of the office. The predominant theme in U.S. politics has always been how do the government’s policies impact jobs.
With this fixation on jobs, the U.S. system is best described as Keynesian. Keynesianism puts job creation at the center of the economic universe and evaluates everything else in its light. There are problems with this approach. Firstly, there is nothing in economics that explains why jobs should be considered more central than consumption, innovation, well-being and scores of other good things. And secondly, jobs centrism leads to an extremely short-term perspective in governing.
The present U.S. president is focused on jobs. His view on policies appears to be simple: whatever creates a job today is better than the alternatives – regardless of what they may be. There is also good news for free trade, though.
Following the same logic, if a free-trade policy creates domestic jobs in the U.S., President Trump will likely be the first one to endorse it.
Who, now, is the real champion of free trade, the U.S. or China? The answer is, none. Both are champions of their own interests. Free trade is only interesting to them if it serves these interests. But after all, that should come as no surprise.