As we approach the end of the year, there is a temptation to look back and reflect on choices made in the past. It is even more tempting to do this if you are reflecting on errors someone else made in the past.
The Trump administration, with its newly released National Security Strategy, engages in just such an exercise. I address the broader economic questions of the National Security Strategy elsewhere, but let us linger on a key early passage devoted to China and Russia. The strategy argues that current competitive relations with these two states:
“…require the United States to rethink the policies of the past two decades – policies based on the assumption that engagement with rivals and their inclusion in international institutions and global commerce would turn them into benign actors and trustworthy partners. For the most part, this premise turned out to be false.”
There are two components to the academic argument. The first is that there was a significant policy choice when China was admitted to the WTO. The second is that this choice had important ramifications for U.S. labor markets. Since I have countered the latter argument elsewhere, let us now take a Dickensian journey back, even before the winter of 2001, and reconsider the policy choice of the time.
That meant that the moment a new country like China joined, it immediately got access to the best deals on offer from everyone in the organization. Such a prize was not bestowed lightly; there were long, country-by-country negotiations about the commitments China would make to justify such treatment.
By 2001 China had promised sufficient reforms to be allowed entry. This required all the other WTO members, including the United States, to grant it MFN status. As a bit of marketing, the actual debate in the United States went by a different acronym – PNTR. Since MFN sounded like we were calling China our ‘most favored nation,’ the policy was rebranded ‘Normal Trading Relations,’ and WTO entry meant that these had to be ‘Permanent.’
So, in a simple-minded burst of optimism, we cut our tariffs toward China in 2001 in exchange for promises of future good behavior? Well, no. U.S. tariffs actually didn’t change at all. The United States had applied MFN tariffs toward China since 1980. It had reserved the right to hike them, had it so chosen, but it didn’t exercise that right. Tariffs stayed low both through the 1989 Tiananmen Square episode and through a presidential campaign in which Bill Clinton had promised a reversal.
The real trade off in 2001 was that China made lots of promises of reform in exchange for the United States (and others) agreeing to stay the course.
[Academic interjection: if nothing really happened, how are celebrated studies finding significant effects from this imaginary “shock”? The researchers are assuming that manufacturers in 2001 were laying awake at night, specifically worried about the reimposition of the Smoot-Hawley tariff levels of 1930. Ostensibly, these worries were relieved – in exact proportion to the old tariff levels – when PNTR passed. If you find that implausible, here’s an alternative explanation: those old 1930 tariffs correlated well with the vulnerability of manufacturing sectors to labor-intensive competition. That’s enough to get the econometric results].
Coming back to the National Security Strategy, it seems to suggest that granting PNTR was an inferior policy choice. If so, by simple logic, we should be able to identify a superior choice. So what might the United States have done, rather than granting PNTR? Some choices, in escalating order of aggression:
- Status Quo Ante. Don’t grant PNTR, but maintain the existing (MFN) policy in place since 1980. This would not have raised any barriers against the influx of Chinese manufactures, but could have precluded U.S. enjoyment of reciprocal Chinese concessions. The only value here would have been preserving a smidgeon of uncertainty about U.S. intentions, at very high cost.
- Tariff Hike. Break from existing policy and raise tariffs on China to 1930 levels (i.e. revoke MFN). This would have been seen as an aggressive provocation at a time when China was trying to reform. Unless other major trading powers, like Europe and Japan, were to have followed the U.S. lead, it would not have had too much effect. Chinese sales to these third markets would have driven world prices downward anyway. This would not have deterred the forces pushing China’s rise – economic reform, integration with a vibrant regional economy, and favorable demographics.
- Rally an international effort to isolate China and prevent its emergence. Since the other measures all led to the same global price effects, what would it take to avoid them? Something much more extreme. Blockade China’s ports and intercept its ships at sea. This might have insulated the world from China’s effect on global prices, but an embargo of this sort would have been seen as an act of war. That carries considerable downside risk, particularly when dealing with a nuclear power.
What do we glean, then, from our journey back through the mists of time? If there were no better alternatives to accepting Chinese concessions as a new entrant to the WTO, then maybe it was not such a bad strategic move after all.