In his famous “Time for Choosing” speech, Ronald Reagan observed: “This is the issue of this election: whether we believe in our capacity for self-government or whether we abandon the American revolution and confess that a little intellectual elite in a far-distant capitol can plan our lives for us better than we can plan them ourselves.”
Many conservatives forget this observation when discussing trade policy. With respect to trade with China, for example, the most important issue is whether we believe in the capacity of Americans to make their own decisions about how to spend and invest their hard-earned dollars, or whether we surrender those decisions to a federal government that decides who we can do business with and under what terms.
Failure to comprehend this is the biggest of several errors in Oren Cass’s recent trade policy recommendations in National Review. “If a resilient, free-market system of international trade is worth fighting for, the United States must be prepared to fight for it,” he writes. But the real fight is against intellectual elites and political operatives whose policy prescriptions would make the United States more like China and other countries where decisions are controlled by the government.
Cass repeatedly applies war-mongering rhetoric to justify new U.S. government interference in voluntary, peaceful commerce: “But if Nation A believes it can choose force that will be met not with force but with complacence, using such force suddenly becomes the most attractive option. It is in this moment, when Nation A chooses force, that Nation B must decide whether to fight back. There are always those calling on B to tolerate the provocation as preferable to open conflict. The word for such an approach is ‘appeasement.’”
That’s not how Ronald Reagan described things: “We’re in the same boat with our trading partners. If one partner shoots a hole in the boat, does it make sense for the other one to shoot another hole in the boat? Some say, yes, and call that getting tough. Well, I call it stupid.”
Economic freedom is the surest route to peace as well as prosperity. French economist Frederick Bastiat understood that throughout history, tariffs had been a major cause of war. Protectionism, after all, is an attempt by governments to inflict on their own citizens in peacetime the same kinds of harm their enemies attempt during wars. Trade alone does not guarantee peace, but it is a mistake to describe voluntary, mutually beneficial exchanges as some type of warfare, as protectionists often do.
Cass also betrays a lack of understanding of what drives trade balances. The U.S. has run significant deficits since the early 1980s because of the combination of federal deficit spending and domestic investment exceeding domestic savings. Bilateral deficits do not matter. If the U.S. deficit with China were to shrink due to protectionism, then the U.S. would just run a larger deficit with the rest of the world. And while China does run a large bilateral trade surplus with the United States, its overall surplus has been falling rapidly. Once 10 percent of GDP in 2007, the current account surplus has shrunk to just 2 percent of GDP in recent years.
In addition, Cass mentions nothing about ways the United States has benefited from the growing economic relationship with China. For example, the Chinese had Treasury debt holdings of approximately $1.3 trillion in April 2014, much of which provided them with little in interest income. The U.S. conversely, can borrow at historically low rates of interest and not worry about financing its national debt for now.
And then there is Chinese investment. For the first time in 2013, Chinese outbound foreign direct investment (FDI) in the United States exceeded U.S. outbound FDI to China. The size of Chinese outbound investment to the United States is only expected to increase, having a positive impact on high-paying jobs.
Cass dismissively accuses those who disagree with him of suffering from “blind allegiance to free trade.” Perhaps their views are not driven by blind allegiance, but by an understanding of basic economics as explained by Adam Smith, David Ricardo, Joseph Schumpeter, Milton Friedman and … well, just about every living economist. Or perhaps they’ve actually taken the time to compare countries worldwide to see which trade policies work. Resources such as The Heritage Foundation’s Index of Economic Freedom show an undeniably strong and consistent correlation between countries with low trade barriers and countries with economic prosperity.
Reading Cass, one can’t help but be reminded of critics who said Japan was “buying up America” in the 1980s and wrote best-selling books like “Trading Places: How We Allowed Japan to Take the Lead” and “Japan as Number One.” Today, Cass says: “If China is the next Japan, the United States should be very worried indeed.” He’s right – not because China is about to surpass us, but because if China is the next Japan, it’s headed for decades of economic stagnation.
Cass can’t seem to make up his mind about what exactly is the source of the threat posed by China.
Is China is an economic juggernaut engaged in economic warfare? “As the Chinese economy grows ever larger, its technological capabilities expand, and its policymakers become emboldened by the world’s acquiescence, the situation only becomes more dire and the U.S. ability to respond more constrained.”
Or is China paying the price for self-destructive economic policies? “The situation is only worsening. The Economist announced in a cover story earlier this year that ‘China loses its allure,’ noting that while ‘China’s government has always made life difficult for firms in some sectors . . . the tough treatment seems to be spreading’ and companies are being forced to pull out.”
Cass implies Americans who choose to buy iPhones designed in California and assembled in China are not smart consumers taking advantage of global supply chains, but victims of predatory pricing. To protect Americans from being similarly exploited in the future, he says: “[T]hreatening nations like China with severe trade sanctions is critical to ensuring a prosperous future for the global economy” (emphasis added). One can almost imagine Cass posting armed guards at the entrance to every Walmart and Target in the country to protect shoppers from the threat of low-priced imports.
Cass wants to make the United States more like China by empowering the government to impose new restrictions on voluntary trade and investment decisions made by millions of individual U.S. consumers and businesses. But giving even more power to a federal government that is already too big and that interferes too much in Americans’ lives is a terrible idea.
Instead, the United States should reduce barriers to economic freedom — including trade and investment barriers — and work to become the global leader in economic freedom.