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If there’s a trade war between the U.S. and China, don’t blame Donald Trump: China started it long before he became president. Even free traders and internationalists agree China’s predatory trade practices – which include forcing U.S. business to transfer valuable technology to Chinese firms and restricting access to Chinese markets – are undermining both its partners and the trading system.
Mr. Trump’s China crackdown is risky, but it’s on firmer legal, political and economic ground than many of his other trade complaints, for several reasons.
#1 These products are different
The classic case for free trade predicts that each country specializes where it has a comparative advantage, lowering costs and raising incomes for everyone. If China subsidizes exports of steel to the U.S., in theory the U.S. still benefits because consumers and steel-using industries will have lower costs, and while some steel jobs will disappear, more productive jobs elsewhere will take their place.
But starting in the 1980s, economists recognized that comparative advantage couldn’t explain success in many industries such as commercial jetliners, microprocessors and software. These industries are difficult for competitors to enter because of steep costs for research and development, previously established technical standards, increasing returns to scale (costs drop the more you sell), and network effects (the more customers use the product, the more valuable it becomes).
In such industries, a handful of firms may reap the lion’s share of the wages and profits (what economists call rents), at the expense of others. China’s efforts are aimed at achieving such dominance in many of these industries by 2025.
“China is undermining or taking away some of our rents, so we are relatively worse off and they are better off,” says Douglas Irwin, author of “Clashing over Commerce: A History of U.S. Trade Policy.” Unlike Mr. Trump’s tariffs on steel and aluminum, “a lot of economists would hold their fire in terms of attacking Trump for his China actions. I don’t think anyone can really defend the way China has moved in the past few years, violating intellectual property and forced technology transfer.”
#2 The WTO isn’t enough
When China joined the World Trade Organization in 2001, many advocates thought it would play by the global rules against advantaging its own firms and hurting others. Instead, China does so anyway in ways not easily remedied by the WTO.
Rob Atkinson, president of the Information Technology and Innovation Foundation, notes that a WTO case typically requires evidence from an aggrieved company. But many foreign companies are reluctant to complain about their treatment in China for fear of retaliation, such as being investigated for antitrust, consumer abuse, fraud or espionage, or losing sales to state-controlled companies. With no balance of powers or independent courts, “there is no rule of law to constrain Chinese officials from implementing arbitrary and capricious mercantilist policies,” Mr. Atkinson and two co-authors wrote in an extensive critique of China a year ago.
It is also difficult to hold China accountable for its WTO obligations because its system is so opaque. Mr. Atkinson says many discriminatory measures aren’t published, or published only in Chinese. When the central government, under external pressure, rescinds some discriminatory measures, they reappear at the provincial and local level, he says.