Gains from U.S. Trade Policy with China and the Four Tigers
The stunning economic development of Asia’s “Four Tigers” (HK, Taiwan, SK, and Singapore) from 1950s poverty to 1980s prosperity astonished the economics profession and foreign aid community. These were four countries who received little foreign aid but lots of foreign investment. These countries generally ignored mainstream development economist’s advice to government’s to borrow and protect State Owned Enterprises (SOEs). India, African countries and Latin American countries generally stagnated or declined as they misdirected hundreds of billions of foreign aid funds, while Asian companies and countries transformed themselves through international investment and trade into advanced developed countries.
|Rise and Fall of the Chinese Economy (see below)|
Since the 1980s, China has generally followed the footsteps of the Four Tigers. As China’s economy was gradually opened to free enterprise and foreign investment (and expertise), economic progress again was astonishing.
See The Economist “Towards the end of poverty,” (2013): Nearly 1 billion people have been taken out of extreme poverty in 20 years. The world should aim to do the same again.
And more recently, “Global Poverty’s Defeat Is Capitalism’s Triumph,” (Investor’s Business Daily (Online) on October 10, 2015)
China’s population being much larger than all the other Asian countries combined, it’s economy has absorbed far more capital for factories and assembly plants, and created far more jobs, and exported far more low-cost textiles and manufactured goods to the world.
China’s economic success has been most of all good for the people of China but also good for consumers in U.S. Less expensive clothes and manufactured goods made in China helped lower costs and raise living standards for everyday Americans (clothes, for example, are much less expensive now than they used to be in the 1980s). (For more on this, see Don Boudreaux’s The Benefits of Free Trade: Addressing Key Myths.)
In “The Future of U.S. Trade Policy,” the Council on Foreign Relations provides a helpful overview of the nuts and bolts of trade policy. The economic benefits are fairly clear, but the political path for trade negotiations is often messy.
The reduction of trade barriers around the world followed a series of international trade agreements and only later fractured into regional trade agreements. And all through this process protectionists in each country, usually manufacturing and labor interests, lobbied against further reduction of trade barriers.
There wasn’t much resistance to more open trade with China in the 1980s because there wasn’t much that China produced that was a threat to U.S. companies and labor unions. At the time, special interests in the U.S. focused on restricting trade with Japan, trying to raise tariffs on Japanese cars, steel, and later computers.
The CFR Backgrounder notes:
The effects of globalization, however, have increased resistance to further trade liberalization. Many in the U.S. labor movement, as well as some economists, argue that trade agreements in their current form hurt workers, degrade the U.S. manufacturing base, and exacerbate income inequality. Advocates counter that FTAs create jobs by opening new markets to U.S. exports and making it easier for U.S. companies to compete in foreign markets.
Marian Tupy in a 2006 Cato Commentary, “Free Trade Benefits All,” explains the basics:
There are three important reasons voluntary exchange is good not only for the contracting parties but the world as a whole:
(1) Trade improves global efficiency in resource allocation. A glass of water may be of little value to someone living near the river but is priceless to a person crossing the Sahara. Trade delivers goods and services to those who value them most.
(2) Trade allows partners to gain from specializing in the producing those goods and services they do best. Economists call that the law of comparative advantage. When producers create goods they are comparatively skilled at, such as Germans producing beer and the French producing wine, those goods increase in abundance and quality.
(3) Trade allows consumers to benefit from more efficient production methods. For example, without large markets for goods and services, large production runs would not be economical. Large production runs, in turn, are instrumental to reducing product costs. Lower production costs lead to cheaper goods and services, which raises real living standards.
For overall U.S. trade policy with China, one reform proposal is to separate trade reform from “statecraft.” Simon Lester in “Chinese Free Trade Is No Threat to American Free Trade” (April 22, 2015) is critical of mixing foreign policy with trade policy:
Using trade agreements for foreign policy purposes is common, but it is often misguided and can undermine economic welfare. To take one example from recent trade negotiating history, the United States has an FTA with Australia, but not with New Zealand. Why discriminate among these very similar Pacific nations, and limit the scope of trade liberalization? In this case, it was to reward Australia for its support for the Iraq war, and to punish New Zealand for not doing so.15
In practice, then, weighing down trade negotiations with foreign policy runs the risk of having foreign policy mistakes undermine our economic policy. Trade policy matters for its own sake: the main goal is to improve economic welfare. Letting foreign policy play too big a role undercuts these economic considerations. Free trade with the Pacific region is good economic policy. The fact that it can strengthen our relationships in the region is a side benefit, of course, but should not be the guiding rationale.
Students who want to learn more (a lot more) about development economics, can take a full course for free on the Marginal Revolution University website. Just 25.5 hours of videos!
And for a video overview of Chinese economic development, Tyler Cowen’s recent video (October 21, 2015), “The rise and fall of the Chinese economy,” is highly recommended.
In this new video, The Rise and Fall of the Chinese Economy, I discuss problems and prospects for the Chinese economy, given the latest developments. This is the most recent addition to the Everyday Economics series from MRUniversity, and it also will be part of our forthcoming macroeconomics course. It is done in a slightly new style, I hope you enjoy it.