Free Trade Delusions versus the Real World

Some observations from Clyde Prestowitz from about 10 years ago on China, but still relevant:

“… China has become the location of choice for global manufacturing. This is usually attributed to its low wages. Chinese factory workers today earn 50 cents to $2 an hour and often work long shifts, getting minimal time off for weekends and holidays. But low wages are not the only factor; after all, wages in places like Vietnam, Myanmar, and Africa are even lower. China’s workers are not just inexpensive but literate, hard working, already reasonably skilled, and eager – nay, desperate – to be trained. There is also a sizable and growing cadre of university-educated technologists and professionals. For example, China is now graduating 330,000 engineers and scientists annually, as compared with 398,622 for the United States. China has also invested extensively in infrastructure and now has a very workable system of airports, harbors, communications, and roads. …

Today, China is already the largest market in the world for steel, mobile phones, cement, aluminum, and electronic components. Within 20 years, it will likely be the largest market in the world for just about everything. If you are a manufacturer, you will pretty much have to succeed in the China market to have a chance of surviving anywhere else. In theory, you can serve the China market by exporting, but there are some good reasons why you might not. Because Chinese labor is inexpensive, production processes that are capital-intensive in the advanced countries can be ‘dumbed down’ and made much less capital-intensive in China. As a manufacturer, you cut both your wage and your investment costs. On top of that, the Chinese government at local, provincial, and national levels will offer substantial investment incentives – such as long tax holidays, capital grants, free land, low utility rates, worker training, and other benefits – to companies willing to put plants and research-and-development facilities in China.

These investment incentives confound free-trade theory. They are, in fact, distortions of the market, and therefore of questionable legitimacy under the rules of the World Trade Organization. This has never been challenged because other countries have investment subsidies, too. (American states offer tax deals to induce companies to invest.) China, however, subsidizes investment strategically to capture new industries at higher levels than anyone else.” .
Clyde Prestowitz, “China as No. 1,” The American Prospect, February 21, 2005
http://prospect.org/article/china-no-1

China’s success is often attributed to low wages and the artificially lower value of the RMB, and the latter is indeed a de facto export subsidy and type of industrial policy. There is also the issue of government coercion that, by and large, keeps the labour force docile and free from independent trade unions that would raise wages and improve working conditions. We must add to this the famous “China syndrome” (the fact that China is such a big potential market, there has been an unprecedented, overriding rush by Western capital to get into the country) as well as the lower safety standards, lax environmental regulations, etc.

But, as Prestowitz notes, there are massive anti-free market government interventions that go far deeper than this, and actually involve a broad kind of neo-mercantilist, nationalist industrial policy.

There is also massive technological and intellectual property rights theft, and this is also often done inside China by forcing foreign corporations to agree to joint venture companies as the condition of access to Chinese markets (see here, here, here).

In short, this is not free trade, but an aggressive, interventionist, beggar-thy-neighbour mercantilist strategy.

Western political leaders are mostly clueless about this and are brainwashed in their neoclassical, pro-free trade theology.

This is just another pressing reason why the mad pro-free trade fanaticism in the West should be abandoned for the nonsense it is.

Defence of Western prosperity can’t be left to the fairy-tale free market, but requires strong and nationalist governments in the West that would implement their own type of industrial policy, sensible protectionist measures, and government policies to promote massive reshoring of manufacturing. This doesn’t mean of course that the West would be blind to Third World development at all. But this can be better done by sensible heterodox development economics and international institutions and sharing of technology in a way that doesn’t simply de-industrialise the developed world and export Western jobs to the Third world.