China vs. the U.S.: Permanent Normalized Trade Regret
Welcome back to Friday. This is our weekly wrap-up of news about the economy, the ongoing collapse of expert authority, and epochal policy mistakes by our nation’s leaders and the public intellectuals who support them.
Twenty-five years after we opened our markets to China, Beijing celebrated the anniversary by closing its own markets. Economists are still hiding from their massive failure to foresee the results of trade with China and now trying to figure why tariffs work when they weren’t supposed to. And in our nation’s capital, Republicans are still explaining why they’re planning on shaking down the middle-class to pay for Obamacare. Progress, in its own peculiar way.
Happy Twenty-Fifth Chinaversary!
This week marks the twenty-fifth anniversary of China being granted Permanent Normalized Trade Relations with the U.S., paving the way for China’s entry into the World Trade Organization the following year. While Breitbart marked the quadranscentennial with a guest essay by Senator Jim Banks (R-IN), the occasion received almost no notice in legacy media outlets or academia.
We suspect one reason for this is that any remembrance would make it clear that granting normalized trade relations to China was one of the worst public policy mistakes in the history of the United States. At the time, the consensus among American political leaders and public intellectuals was that deeper trade ties would benefit the U.S. economy and American workers, lead to political liberalization and promote individual rights in China, and open a huge new market for U.S. businesses.
Here’s a brief excerpt from the remarks of President Bill Clinton after the U.S. Senate approved PNTR for China:
In return for normal trade relations, the same terms of trade we offer now to more than 130 other countries, China will open its markets to American products, from wheat to cars to consulting services. And we will be far more able to sell goods in China without moving our factories there…
The more China opens it markets to our products, the wider it opens its doors to economic freedom and the more fully it will liberate the potential of its people.
When China finishes its negotiations and joins the W.T.O., our high-tech companies will help to speed the information revolution there. Outside competition will speed the demise of China’s huge state industries and spur the enterprise of private-sector involvement. They will diminish the role of government in people’s daily lives. It will strengthen those within China who fight for higher labor standards, a cleaner environment, for human rights and the rule of law. And we will find, I believe, that America has more influence in China with an outstretched hand than with a clenched fist.
The reality was almost the photographic negative of this. U.S. companies were not only required to manufacture goods in China in exchange for access to its market, they also had to take on Chinese partners. That arrangement facilitated technology theft. U.S. exports to China did not grow anywhere near the pace of China’s economy, so that today the ratio of exports to China’s G.D.P is around two-thirds of what it was prior to the turn of the century. China’s exports to the U.S. went the other way. In 1999, U.S. exports to China equaled about 1.2 percent of China’s GDP. Today that share is roughly 0.8 percent. Over the same period, China’s exports to the United States rose from about 0.9 percent of U.S. GDP to 1.5 percent. In other words, we switched positions and then some.
President Bill Clinton is surrounded by Secretary of State Madeleine Albright, Treasury Secretary Lawrence Summers, Trade Representative Charlene Barshefsky, House Speaker Dennis Hastert, and members of Congress as he signs a Permanent Normal Trade Relations for China Bill on October 10, 2000, in Washington, DC. (Mark Wilson/Newsmakers via Getty Images)
China is still dominated by state industries, state-adjacent businesses, and a ruling party clique. The primary political reform has been the consolidation of authority around a single dictator, Xi Jinping. The Chinese government’s role in the daily lives of its citizens has grown rather than diminished. The heads of those within China who fight for human rights, the rule of law, the environment, and higher labor standards have been chopped off. We have less influence in China than we did.
It shouldn’t be missed that this episode would be a fiasco for the field of economics if knowledge of it had wider circulation. It was the near-universal consensus among U.S. economists at the time that access to U.S. markets would liberalize China, promote individual liberty, remove power from central planners, bring down China’s trade barriers, and be an unqualified boon to the U.S. economy.
In 2000, more than 150 of the most prominent economists of the era—including 13 Nobel prize winners—signed an “Open Letter to the American People” urging the U.S. to support China’s entry into the WTO. It was arguably the most elite intellectual endorsement of globalization since Bretton Woods. Two and a half decades later, the historical record gives us a clear verdict: almost every major forecast in that letter failed. Even worse, there has never been a public reckoning with this catastrophic failure of foresight and errantly deployed expert authority.
China’s Anniversary Gift: Rare Earth Retaliation
China chose to celebrate the anniversary by ensuring it was conducting global trade with “Chinese characteristics”—in other words, by weaponizing its dominance in rare earth minerals. Beijing announced sweeping, stringent export controls and new licensing rules covering any product containing even trace amounts of Chinese-processed rare earths. The move reverses the conciliatory tone China struck in trade talks earlier this year in Geneva, London, and Stockholm.
No one should be surprised. State-directed economic aggression is the perfect way for China to celebrate a quarter-century of exploiting Western openness.
President Trump responded by canceling plans to meet with Xi Jinping later this month in Korea and threatening “massive” new tariffs. That’s a good start. But the deeper lesson is that America’s dependence on Chinese supply chains remains a strategic vulnerability. If this episode accelerates decoupling, Beijing may have done us an unintended favor.
Economists: Still Getting Trade Wrong After All These Years
Even the Washington Post is starting to admit what we’ve been saying for years: the consensus among economists was seriously wrong about tariffs. In a remarkable column this week, Matthew Lynn wrote that the profession’s forecasts of recession and runaway inflation have collapsed under the weight of reality — growth near four percent, inflation under three, and booming tariff revenues. The piece marks a turning point: after decades of anti-tariff dogma, the public debate is shifting toward the populist view that markets adapt, foreign producers absorb costs, and the U.S. can use trade policy to strengthen its own economy.
Will the GOP Become the Tax Collector for Obamacare?
Strip away the shutdown theatrics and you hit the real question: Do we lock the Affordable Care Act (ACA)’s pandemic-era subsidies in as a permanent entitlement?
Obamacare was originally sold as a way to reduce healthcare costs without expanding government spending—a self-financing reform that would even trim the deficit, according to its advocates. It did none of that. Premiums rose, and the program now costs hundreds of billions of dollars over the next decade.
That created pressure to expand subsidies. When COVID hit, the pressure became unbearable. The enhanced credits were sold as temporary affordability relief. Democrats now want them permanent, turning Obamacare from a regulated marketplace with targeted aid into an open-ended entitlement that grows automatically with premiums and enrollment.
Republicans object on cost—and on principle. But politically, those are losing arguments. They’re being maneuvered into acting as the tax collectors for the Democratic healthcare state. Democrats are shutting down the government to lower premiums, while Republicans are arguing for higher household costs. That’s not a winning frame.
There is an exit ramp, though it’s not cheap. Republicans could back continuing the enhanced subsidies for working- and middle-class Americans, while ensuring illegal aliens—including DACA recipients and Biden’s parolees—remain ineligible. They could also restore small premiums for the “Zeros,” those paying nothing under the current formula. Even $30 a month—a typical phone bill—would strike most voters as fair and restore the principle that beneficiaries should contribute something.
Read the full article here