It’s a mistake to think of Donald Trump as a protectionist, as Boris Johnson will have discovered during his recent visit to New York. Theresa May has said that some protectionist instincts are starting to creep in and that the UK should be a champion of free trade. Her remarks are widely interpreted as a reference to policies planned by Donald Trump, but his plans can just as easily be seen as a defence of a rules-based international trading system. One of the 28 pledges made in his Contract with the American Voter was to 'identify all foreign trading abuses that unfairly impact American workers' and to use 'every tool under American and international law to end those abuses immediately'. Using the rules of the World Trade Organisation (WTO) to combat Chinese mercantilism is not protectionism. Nor is his promise to declare China a currency manipulator on his first day in office.
Free trade is defended because it can be mutually beneficial but, rather like toleration, it only works if everyone plays by the same rules. Toleration of aggressively intolerant groups gives them an advantage. In the same way, free trade only makes everyone eventually better off if we are all looking for mutual benefits. The outcome will not be beneficial to everyone if one nation treats trade as a kind of substitute for war and aims to gain advantage at the expense of others in order to achieve economic and military superiority. Historically this attitude was called mercantilism.
Is it correct to describe China as mercantilist? Economists argue that prosperity comes from a combination of the division of labour and trade between independent firms. They claim the same for the international division of labour, but often forget the preconditions for their model to work. Companies must be genuinely independent, which means they must make ends meet and so must be efficient to survive. Competition encourages a search for efficiency.
Some argue that world prices are the measure of efficiency but this claim ignores today’s realities. Often world prices are not market prices and this is especially true of Chinese export prices. China manipulates its currency by forcing exporters to save their US dollars in the form of Chinese government bonds denominated in dollars. The dollars are used to buy US Treasury bonds and other US assets, thus pushing up the exchange rate of the dollar. China prevents the free negotiation of wages; indeed it represses trade unions. Its companies do not meet international accounting standards, which are designed to promote transparency. It subsidises exports, contrary to WTO rules, and it imposes import tariffs contrary to WTO rules. It has weak environmental regulations, thus reducing its costs. It has weak health and safety laws that, despite their inadequacy, are frequently not enforced. It has state owned companies that subsidise exports, directly and indirectly. It has state owned banks that provide undisclosed subsidies. Its government offers land at low undisclosed rents. Private companies are not genuinely private, but require a political patron to survive.
The aim of the system is to bolster the power of the Communist party, a brutal authoritarian dictatorship. This is the exact opposite of America, where private wealth helps to empower opposition to the government of the day. For example, Jeff Bezos, the founder of Amazon, recently bought the Washington Post newspaper, which campaigned against Donald Trump. If he had tried to do the same thing in China he would be lucky to still be alive. There is not the slightest chance in China of building up a media group to criticise the government, let alone to create a viable government in waiting. It’s true that money can be used in America to cajole public opinion and ‘buy’ votes, but not just for one party. In the West, wealth upholds freedom and democracy.
China is not a free society. The more economically powerful it gets the more it threatens the free world. If its firms are not state owned they are state dominated. There is no genuine private ownership; there is state authorised discretion. The aim of economic activity is to keep power in the hands of the Communist party. There are no checks and balances. The more we promote Chinese prosperity at our own expense the more we endanger liberty itself.
Currency manipulation is a longstanding problem. Keynes warned of the dangers during the long negotiations leading up to the Bretton Woods agreement at end of World War Two. His warnings were ignored and by the 1980s there was strong concern about Japanese currency manipulation. In 1985, under the Plaza Accord, measures were taken to force up the price of the yen. Today it’s China that is getting away with it and action is long overdue. No one who advocates free trade should ignore this problem. Some economists talk as if world prices are the result of competition between independent organisations in a rules based system, when they are not. Calling for free trade while ignoring economic realities is like calling for deregulation of financial services before 2008. It’s what led to the 2008 crash.
The problem is not just low-wage competition. Chinese cheating also takes market share from low-wage countries. Today the problem we face in the West is not competition from low-wage economies but mercantilism, and the challenge is how to make a reality of the rules-based order we have. That is what we should champion. Not the pretence that all we need to do is eliminate barriers. It is misleading to portray free trade and protection as the only two alternatives. The top priority is to act against nations with long-standing trade surpluses that are the result of mercantilist manipulation.
The UK’s policy towards China is an economic and political blunder. Theresa May has been talking about a ‘golden era’ for China-UK relations and has promoted investment by Chinese companies in the UK as if it were like any other inward investment. The reality is that no company in China is genuinely private. Any chief executive who fails to comply with the wishes of the Communist party will soon find the secret police calling. Any significant private organisation in China can only function with a political patron. Letting Chinese companies take over UK businesses is like letting the Chinese government take them over. We don't want our own Government to nationalise our companies, because we fear the abuse of power, and yet we stand by and clap our hands when the Chinese government takes them over. Even Germany has become alarmed at the extent to which China is taking over its famous Mittelstand of high-tech world-beating companies. The German government recently stopped the takeover of the technology company Aixtron, when it looked as if one Chinese company cancelled an order, which pushed down the share price of the German supplier, so that a second Chinese company could buy Aixtron for less. The German economics ministry has warned that in 70 per cent of the twenty largest recent takeovers, the purchasing Chinese company was majority-owned by the Chinese government.
The Government showed awareness of the dangers when it suspended the decision on the Hinkley Point nuclear reactor, but its determination lasted about five minutes. We should now stand shoulder to shoulder with the Americans to uphold the rules-based system of international trade and act against currency manipulation.
David Green is Director of Civitas