It was tempting to dismiss a recent Financial Times op-ed by a China-based international lawyer with a few (appropriately) cynical tweets. The author, after all, was urging the Chinese government to heed Premier Li Keqiang’s call for more rule of law in the People’s Republic, and wrote that abundant evidence indicated that Beijing authorities are picking exclusively on foreign firms in their investigations of corporate wrongdoing. What else can you reasonably say but “Too funny” and “Duh”, respectively?
Worthier of serious comment was author Tao Jingzhou’s observation that “none of the foreign companies singled out by” China’s National Development and Reform Commissin for price rigging “has mounted a defence. All admitted wrongdoing even before a price investigation began.”
Yet what’s important about the foreign firms’ behavior is not the apparent cravenness it reveals. These companies have meekly endured corruption and legal and regulatory discrimination for decades. Their reasoning? Access to China’ big and potentially gargantuan market would eventually more than offset their tribulations. What’s important instead is what the multinationals’ assumptions show about an ignorance of China’s development philosophy that far transcends the corporate sector, and that explains why continued economic integration with the current Chinese regime can only be a loser for America, and for the entire world economy.
For China’s behavior, and especially its clearly ramped up campaign against foreign investors, should make clear that Beijing emphatically rejects the doctrine of comparative advantage that has justified global trade liberalization literally for centuries and U.S. trade policy in particular for decades. This theory, of course, holds that the freer global trade flows become, the better able national economies will be to focus on the goods and services production at which they’re most proficient, the more efficient the entire world economy will become, and the more prosperous all countries and their people will grow. In other words, freer trade will enable the power of specialization to create an optimal global division of labor.
In particular by encouraging foreign firms to bring their capital and technology to China, and by reducing many trade barriers and introducing numerous other free market reforms, Chinese leaders have long indicated that they buy into comparative advantage and all of its implications. But as revealed by their ever rougher treatment of foreign investors, and by other signs of resurgent protectionism, helping to create the most efficient possible global division of labor and the most prosperity for all was never part of China’s game plan.
Rather, the aim was always maximizing China’s wealth and capabilities, whatever the international impact. As long as foreign capital and technology have been needed to achieve this goal, they’ve been welcome. Now, however, China evidently views foreign contributions to its economy as ever less important. And having chewed up these non-Chinese enterprises, it now looks like it’s starting to spit them out.
Comparative advantage, of course, portrays this behavior as perverse not only from a global standpoint, but from China’s standpoint. But before reflexively endorsing this view, think of the situation as China’s leaders undoubtedly do (unless you believe they’re completely stupid): China is already an immense economy and keeps growing. Its population, though stabilizing, is even bigger. Therefore, the country is already a gigantic store of actual and potential talent, knowledge, and resources. Which means that China already possesses, or can realistically hope to develop on its own, all of the main assets and capabilities that comparative advantage theory and its corollaries claim can only be accessed by extensively integrating with the global economy. That is, Chinese leaders view their own country as a reasonably close approximation of the international economic system as a whole in crucial respects, and believe that by focusing exclusively on China’s own development, it can reap all of the advantages of such integration while paying none of the costs.
And here’s an irony for you: The United States has always been, and remains in, a far better position to prosper without freer trade and greater global integration than China. For unlike China, the United States has always been diverse enough economically and socially to reap on its own at least most of the benefits of competition that free global trade alone supposedly can provide. A much greater degree of competition, moreover, could easily be created through greater anti-trust enforcement. Finally, whatever the United States does need to access from the international economy could readily be obtained, in principle, China-style – by capitalizing on the truly matchless lure of its domestic market, and strategically opening to trade and investment. Surely that’s why, for most of its history, free trade etc. had nothing to do with the strategy the United States actually pursued — and the unprecedented success it achieved.
China’s social and political systems are so noxious that it’s easy to understand why Americans reject the notion that the PRC’s bullying of foreign firms can teach them anything useful. Why Americans keep refusing to learn from their own economic history, especially given the mounting failures of their current approach to the world economy, is much harder to figure out.