How often have you read or heard recently that China is the country’s biggest trading partner of country X as an explanation for why that country leans toward China or might lean toward China or “doesn’t want to be forced to make a choice between China and the United States”?
In a recent speech, Wilson Center President and former Ambassador to Tanzania Mark Green emphasized that China is the largest trading partner for 120 countries. He went on to emphasize that the days of American dominance of international trade are over and urged that Washington get on its horse and sign more international trade agreements quickly.
In May of last year, Outlook India emphasized that China, not the U.S., remains India’s largest trading partner despite continuing tensions between Delhi and Beijing. Also on May 11 last year, Bloomberg News reported that Southeast Asian countries were disappointed because Washington was not matching China in its trade with them and not opening its markets further to them. In March of last year, Harvard’s Graham Alison lamented that China had surpassed the United States as the world’s leading trading nation and called for America not to try to force other nations to choose to be aligned with the United States rather than China.
At the heart of this talk is the economics establishment’s assumption that trade is always a good thing and that more is always better. Behind this lies another assumption which is that international trade is always the same thing regardless of the parties (countries, corporations, businessmen and women) and the goods and services involved. It is assumed that trade is always and only about business, selling high and buying low by private parties in free and open markets for the purpose of making profits today.
These assumptions are badly wrong. Trade between Canada and the United States is a very different experience than trade between the United States and Japan which is again an entirely different thing from trade with China. The structures of economies, the control or lack thereof of giant corporations, the power and role of labor unions, the banking rules, the management of currency values, and crucially, the ways of government management of economies differ dramatically. Markets are not necessarily free and open. They may be partially open or open based on certain contingencies such as transfer of technology. They may be controlled by or be subject to the strong influence of governments and even be dominated by state owned corporations. Indeed, the twelve largest corporations in China today are all state owned. Their major objective is not maximize profits for shareholders. It is to achieve certain government policy objectives. Or take a corporation like the French auto company, Renault. The French government owns a “golden share”, meaning it can override the wishes of other shareholders. Of course, Renault wants to sell autos and to survive as a major auto maker, but the government also wants it to employ workers and develop nationally useful technologies. The governance and objectives of Renault are quite different from those of Ford or Honda.
The biggest outlier in today’s global economy is China, hands down. About 40 percent of its GDP is generated by state owned corporations which also account for about 60 percent of the value of the capitalization of all Chinese corporations. In the People's Republic there are, of course, no labor unions, but, far more importantly, private corporations can be directed to fuse with state owned corporations if their products or services are deemed to be essential to national security. In Beijing, this is called Civil-Military Fusion.
As a leader of the first U.S. trade mission to China during the Reagan administration in 1982, and as Vice Chairman of President Clinton’s special Commission on Trade and Investment in the Asia-Pacific Region in the late 1990s, I witnessed a farce that came to be called “positive engagement” with China. From Reagan to Bush to Clinton to Bush (W), to Obama the American ruling classes convinced themselves that they were capitalizing and democratizing China. They told themselves that China was doing away with state owned enterprises. They ignored the succession of five year plans under which the Chinese government (not its private businessmen and corporations) aimed to achieve parity with and then superiority to the industrial and technological capabilities of the world’s rich democracies. Indeed, they encouraged their privately owned corporations to invest in and move production from their own countries to China. Because of its lack of labor unions, low wages, government subsidies, and purposely undervalued currency, China increasingly became the low cost production location for a wide variety of manufactures which were exported at very low prices to the rich democracies. Economists like then Federal Reserve Chairman Alan Greenspan warmly welcomed this development because it meant more or less permanently low inflation. That it also meant the loss of a wide variety of valuable skills, a loss of the huge benefits of economies of scale, a great increase in greenhouse gas emissions (China had no environmental rules), rapidly increasing dependence on a country openly hostile to the most fundamental of democratic values and on a long, risk laden international supply chain, the loss of millions of well paid manufacturing jobs, the effective death of many American communities, and an enormous, ever growing trade deficit was not something that bothered Greenspan, or the Chamber of Commerce, or Wall Street, or the Council of Economic Advisors, or the New York Times, Wall Street Journal, and Washington Post, or the major economics think tanks like the Brookings Institute and the Peterson Institute for International Economics. Their jobs and pensions were all safe as they worshiped at the alter of what they called Free Trade.
Even more interesting and perplexing has been the actions and policies of major business leaders. They saw China as the new El Dorado from which they would just funnel enormous gold into their pockets and those of their shareholders. Apple is a great example. It was founded by Steve Jobs on the basis of technology developed largely by the U.S. government’s Defense Advanced Research Projects Agency (DARPA). For about twenty years, it produced most of its products in California using well paid American labor and meeting strict American environmental requirements. The company and Steve became very wealthy in this way while also providing lots of well paying jobs with good benefits for employees in California and elsewhere in the United States. Importantly, Steve did not take orders from Washington or any other government. He ran an independent business. Sometimes he asked the government for help in getting into tough markets like those of Japan, but he was not afraid to ignore Washington if he disagreed with it.
Then, in 1998, Steve hired logistics whiz Tim Cook to run Apple’s production and logistics. Cook had had experience in China and convinced Steve that he was throwing away money by manufacturing in California. The decision was made to fire all the California workers and move all production to China with its low wages, absence of environmental restrictions, and absence of labor unions.
Wow. Apple quickly made even more short term money than anyone could have imagined. In fact, it became the world’s most valuable company.
But it also became something no one had anticipated. It became a hostage, a hostage to the government of China which operates without a rule of law and to the Chinese Communist Party that owns the government and that has openly announced its main objective to be the global displacement of the United States and of the democratic governments of the world.
Back in 2019-20, students were demonstrating in Hong Kong against its effective annexation by Beijing. They used an app in the Apple app store known as Hong Kong Map Live. It showed the streets of Hong Kong in real time. The kids could see where the police were and, of course, took their demonstrations to where the police were not. This was driving the Communist Party leaders in Beijing crazy and they let Apple know that they did not like that app. Within two days it was out of the app store.
This raises a fascinating question. Is Apple really an American company as it says it is, or is it truly a Chinese company. My guess is that Tim pays a lot more attention to Xi Jinping than he does to Joe Biden. And, it is not only Tim. Any major foreign corporation that is substantially dependent on China must pay more careful attention to the Chinese government than to its own theoretically “home country” government.
Thus to speak of trading with or investing in China is wholly different than to speak of trading with or investing in the EU, Australia, or Mexico. In those countries you might lose money. In China you could lose your company.
Of course, China engages in international trade, but its trade has a dual structure. If your country is an agricultural producer or if it mines coal, iron ore, cobalt, copper, or lithium, it probably is a major trading partner of China because China lacks those items and imports enormous quantities of them. Thus, China accumulates large and constant trade deficits with countries like Australia, Brazil, and Saudi Arabia. But if your country produces manufactured goods and is a large trading partner of China’s, it almost certainly has a trade deficit with China. There are a few exceptions such as Japan and South Korea (albeit Japan’s surplus is declining), but the U.S., EU, ASEAN, Canada, Singapore, UK, and Germany all run large and constant trade deficits with China. To be in that category of major trading partners of China, means a loss of domestic manufacturing capacity, jobs, and sophisticated industrial skills which in turn means a loss of ability to innovate at the cutting edge of technology. It also means a possible need for the governments of the big importing nations to borrow money to cover the costs of health care and other social costs that normally would be covered by taxes on profits and the sale of goods produced.
In short, unless your country is a big mining or farming country, you really do not want it to be among China’s major trading partners.