Jun 20, 2018

White House Report Exaggerates the Threat of Chinese Central Planning

Daniel Griswold Director of Trade and Immigration

In an ongoing effort to justify its escalating trade war with China, the White House issued a report today cataloging all the ways the Chinese government is waging “economic aggression” against the United States.

The one-sided polemic comes from the White House Office of Trade and Manufacturing Policy, run by Peter Navarro. It takes some basic facts about Chinese economic policy and contorts them into a direct threat to our national interest and way of life. As the report states in the opening paragraph:

“The People’s Republic of China (China) has experienced rapid economic growth to become the world’s second largest economy while modernizing its industrial base and moving up the global value chain. However, much of this growth has been achieved in significant part through aggressive acts, policies, and practices that fall outside of global norms and rules (collectively, “economic aggression”). Given the size of China’s economy and the extent of its market distorting policies, China’s economic aggression now threatens not only the US economy but also the global economy as a whole.”   

The paper correctly describes a number of Chinese practices related to intellectual property and investment that the United States and other major trading nations should seek to discourage. Those practices include forced technology transfers or outright intellectual property (IP) theft, excessive restrictions on direct foreign investment in China, favoring of state owned enterprises, data localization mandates, and commercial espionage. But the paper then grossly exaggerates the impact of those practices and the degree of harm they inflict on other countries. The paper also lacks any acknowledgement of the huge benefits Americans enjoy every day from their commercial interaction with the world’s most populous nation.

Right out of the box, the paper commits a fatal error in attributing China’s economic growth to its remaining non-market practices. It is simply not true that much of China’s growth has been achieved because of its “aggressive acts.” China’s growth has been driven by its market liberalization, as incomplete as that process has been. The turning point for China was not when its government embraced a policy of forced technology transfers or restrictions on foreign investment, but rather when it began to turn away from the disastrous inward looking central planning of the Mao era.

Other nations have achieved equally impressive growth miracles without resorting to the kind of “economic aggression” the White House paper credits for China’s success. South Korea, Taiwan, Hong Kong, and Singapore all progressed from poverty to Western-level wealth by pursuing policies significantly more free market and less “coercive” than China’s. Chile, Peru, and more recently India have also seen rapid growth with more conventional policies that fall within “global norms and rules.”

The China growth miracle is more notable because of its sheer size, but it is still a middle-income nation with a per capita GDP that remains far below that of the United States as well as Japan and its other more free and open East Asian neighbors. (See the nearby table.) If China’s coercive system has been the key to its success, why do the people in the break-away province of Taiwan enjoy a per capita GDP today that is three times higher than in China? The answer is obvious for those not blinded by ideology: Its government has pursued more market-friendly policies than that of China. What economic success China has enjoyed in recent decades has occurred despite its “economic aggression,” not because of it.

Purchasing power parity, 2017 US Dollars
Source: CIA Factbook

The paper goes on to cast suspicion on Chinese students and professional workers living in the United States as a potential “fifth column.” Again, it’s an acknowledged fact that China’s government engages in spying for economic as well as security reasons. But it borders on hysteria to paint all 300,000 Chinese students and thousands of Chinese temporary visa holders in the United States as “non-traditional information collectors” in service to China’s government.

The report exaggerates the extent of China’s violation of US intellectual property and its impact on the US economy.  In reality, China is in the middle of the pack in terms of respecting global IP rules. The US Chamber of Commerce ranks China 25 out of 50 major trading nations in its protection of intellectual property, far behind the United States but ahead of Russia, Brazil, and Thailand. Nicholas Lardy of the Peterson Institute for International Economics notes that China ranks fourth in the world in payments of licensing fees and royalties for the use of foreign technology, ranking it ahead of Japan, South Korea, and India. China’s payments reached $30 billion last year, a four-fold increase from a decade ago.

Even if the White House indictment of China is broadly true, it does not justify the imposition of duties on hundreds of billions of dollars’ worth of trade between our two nations. Those duties will only punish American and Chinese consumers and businesses alike without any promise of changing China’s IP and investment policies.

"The greatest threat to our standard of living is not the policies pursued by a foreign power, but those that our own government could impose on us in a misguided and misinformed response to an exaggerated threat from abroad."

Share this

A much more promising approach would be to join with our G7 partners in Japan, Canada, and the European Union in a joint effort to bring pressure on China through the World Trade Organization. Unfortunately, the Trump administration seems to be as eager to foment trade conflict with our strategic friends as it does with our rivals.

Finally, the White House paper betrays a fundamental lack of confidence in the American post-war model of a free and open economy. The White House trade team has yet to receive the memo that central planning lost its Cold War confrontation with the more open free market democracies of the West. China’s government can draw up any plan it wants about dominating key industries, but central planning will not make it so.

Thirty years ago, the focus of US trade skeptics was Japan. Their view at the time was that the Japanese government also had a plan to take over the commanding heights of the global economy—through unfair trade practices, a bulging trade surplus, and industrial policy orchestrated by its mighty Ministry of International Trade and Industry. Yet that model proved to be far less effective and threatening than we were told.

America remains the world’s technological and economic leader because we also remain, for now, the most open, competitive and dynamic major economy in the world. The greatest threat to our standard of living is not the policies pursued by a foreign power, but those that our own government could impose on us in a misguided and misinformed response to an exaggerated threat from abroad.

Support Mercatus

Your support allows us to continue bridging the gap between academic ideas and real-world policy solutions.Donate