China’s Achilles Heal

The media as well as the President seems to be obsessed with China’s subsidizing exports and the economic risks it poses. While the trade imbalance caused by China’s export policy is serious, focusing mainly on it and threatening more tariffs goes down the wrong road.

China’s economic strategy is mercantilism which has proven over centuries to be a failed economic model. As far back as the 18th century when Adam Smith wrote The Wealth of Nations, he demonstrated that labor productivity and free trade were superior to the protectionism that is embedded in mercantilist practices. Centrally planned economies have a superficial appeal to those who believe in top down control but inevitably it is the road to ruin because of misallocated resources and misguided incentives.

China is no exception. It’s economy has been slowing for at least the past year. Friday’s market sell off was driven by weak data on industrial output and retail sales., China had earlier reported a slowdown in trade and economic growth but there is now suspicion that the slowdown has deepened. Time will tell whether that is a consequence of mercantilism.

It is consistent with the inevitable effect of using government directed economic investment to promote industrial growth for export which misallocates resources. In the long run, investing in innovation, technology, and productivity is superior to investing to promote export growth. That is history’s lesson. In today’s globalized world, protectionism keeps firms from adapting to the new market conditions. China recognizes this which is why it engages in forced technology transfers and mandatory joint ventures. Eventually, China will pay a price for ignoring the law of comparative advantage.

Engaging in a trade war with China and focusing on tariffs doesn’t get to the heart of the trade challenge. The Trump Administration’s tariffs approach simply imposes a tax on consumers and has harmed exports. If China wants to give our consumers lower prices, let’s say thank you while addressing the real problems that also include currency manipulation.

Instead of persistent attacks on our allies, the President should start trying to build an economic coalition of our trading partners to challenge China by filing WTO complaints and taking collective actions that will allow markets to drive global trade.

Author: billo38@icloud.com

Founder and president of Solutions Consulting which focuses on public policy issues, strategic planning, and strategic communications.

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