The Line: Free trade in the Chinese era

Durand and Wallace drew the map of modern Asia. They know the place. And then there's Gibson: a liberally-educated, middle-aged frog, climbing out of her tropical well.

In this episode of the Line, they cut through a lot of the noise around US President Trump's decision to pull out of the TPP.

Is this the end of free trade as we know it? Or, is it an attempt to assert some control over the globalisation process--which has been the Asian way all along. And speaking of the Asian way, what will free trade in the Chinese era look like?

Get your subaltern take on the issues of the day, while you do your ironing or whatever.

Here's an excerpt:

Gibson: 

No sooner did President Trump sign an executive order pulling America out of the TPP, than the media went into paroxysms of anxiety, proclaiming the end of Pax Americana and the rise of Pax Sinica.

Cutting through all the noise was a clear-headed op-ed in Singapore’s Straits Times by Kevin Lu, a Chinese Young Global Leader.  What the American media was failing to see, Lu argued, was that globalization and putting America first were not mutually incompatible.

According to Lu, globalization does not mean (nor should it) absolute openness of borders and a complete handover of sovereignty. Instead, what China and Singapore have practiced, and that has worked quite well for them, is a sort of managed globalization, where thoughtfully designed connectivity and putting national interests first go hand in hand.  This could mean putting in place temporary valves that would moderate the flow of capital, ideas etc as needed.

Durand: 

In a sense then, it could be argued that the phenomena of both Brexit and Trump are examples of such temporary valves. They relieve these societies of the unrelenting pressures of globalization for a bit, giving them some breathing room and eventually, more control.

Still, I understand that any move towards protectionism gives some people the shivers, because of course, it always reminds people of the trade wars in the lead up to the world wars of the last century.

Wallace: 

The other thinking for getting everyone onto the free trade bandwagon is also for geopolitical peace and stability. Trade is like the “landing party”. First you go in just to trade. Since the best political system for free-market capitalism is more democratic, free trade would eventually lead to more democratic governments. And if the whole world is more or less democratic, and by default has similar values, there would be less fighting and wars. We would all be so prosperous and busy living the life that no one would want to wage wars. So essentially, make the whole world the same is the ultimate goal. And we’d be so integrated and interdependent that to hurt one would be hurting all of us. And I guess in a multilateral FTA if, say, eighteen out of the twenty parties are in agreement on something it might sort of peer pressure the other two to get in line if they want to stay in the club.

Durand:

You mean it would have a sort of domino effect, right? But there is always the possibility that a regional trading block can institute high tariffs against outsiders, which in turn causes non-members to retaliate with tariffs of their own, leading to the dreaded trade war. Recall that the TPP was at least partially designed to be a party to which China was not invited—America asserting its dominance in the region, as it were.  So multilateral free-trade doesn’t necessarily lead to universal free trade. Which, by the way, is also why some economists prefer the WTO to regional agreements: because nobody is excluded from the get-go.

Wallace: 

The development philosophy that has been pushed by multilateral organizations like the World Bank and International Monetary Fund is also free trade. Most less developed nations started out as natural resource rich, with low skilled labor and lacking in infrastructure in terms of transportation, energy etc. The phase one formula was start selling off your natural resources like timber, metal ores, agricultural produce etc. as this is where you have comparative advantage. The idea is you would then reinvest the proceeds from your exports (provided you didn’t spend it all on useless luxury imports!) in education and training your labor in industries that you would like to foster and nurture, invest in infrastructure like roads, rail, shipping, telecommunication, energy etc., and other programs that would help raise the living standards of your citizens in the format of modern industrialized nations. (It was just assumed that the whole world wanted to model the more developed Western nations, of course.)

Durand: 

But that’s not quite how it panned out in reality, is it?

Wallace: 

No.  What most development economists failed to take into account (or perhaps they were powerless to do anything about them) are the political, cultural, and socio-economic environment in many of these developing nations. Many of them used to be colonies. Many suffered from weak and corrupt governments that failed to ensure that the newfound wealth and prosperity was redistributed in an equitable manner. The elites and military, frequently in partnership with large powerful foreign corporations, would work together to exploit the natural resources and cheap labor for their own gains. Thus free trade (or essentially globalization) came to be viewed as modern day imperialism and represents the evil of adopting the Western political economy (free market capitalism and democratic government) model wholesale without consideration for the local conditions. The inequality that resulted, it could be said, is a major part of the reason we’re seeing the spread of right wing populist movements in many parts of the world right now. Clearly, free market capitalism does not naturally produce transparent, accountable, and representative governments.

Durand: 

Yeah, and aside from the loss of economic control, FTAs can be undermining to sovereignty in other ways. There are some really troubling bits about multilateral treaties like the TPP, which typically include Investor State Dispute Resolution clauses that allow corporations to circumvent a country’s laws if they threaten their business interests in that country. You can imagine a situation where a country’s labor laws give factory workers the right to strike over an issue, and the foreign corporation then demanding compensation from that country equivalent to the loss in the value of their investment.

Wallace:

This reminds me of how Philip Morris sued Uruguay for lost profits due to the Uruguayan government's public health campaign against smoking. A corporation being able to sue a whole government for doing something to protect the health of their citizens?! Crazy! Thankfully Uruguay won the case.

Durand:

Yes, they tried it in Australia and lost there too.

But just because multilateralism isn’t your thing, doesn’t mean that the alternative is autarky—you know that state where a country is completely self-reliant. Instead, you could have bilateral or even unilateral agreements.

This fits in with Kevin Lu’s point about trying to strike a balance between national interest and globalization, because the parties to such agreements definitely have more control over what goes into the agreement. This isn’t rocket science. It’s always easier to arrive at a consensus when you have two people rather than twenty.

Wallace:   

It’s extremely difficult especially when you have hugely varying economies in terms of size, industries, and development. Not to mention political ideologies. For example, Western nations tend to have strict labor and environmental regulations and would like to ensure that the products they import are not harming the environment or using slave labor. Frequently, other governments do not like Western powers coming in trying to pressure them to enforce regulations they do not necessarily value through the FTAs’ terms. It gets into sovereign rights and all that. Don’t tell us what to do! Also, less developed nations have a harder time enforcing standards and regulations due to weak institutional capacity. Therein lies the difficulty of coming to any FTAs.

Durand: 

Yes, and if you can’t get anyone on the same page, there is also the possibility of unilateral free trade--something that was being pushed by the pro-Brexit economist lobby. That’s when a country decides unilaterally to abolish all tariffs. What on earth, you’re thinking. Well, if the whole point of trade is to make a people better off, and if by better off you mean they can consume more, then it makes sense to make imports cheap as possible by abolishing tariffs. Plus, you don’t have to wait for some pompous bureaucrat to parse legalese with his foreign counterpart--you can just get to it. But wait a minute, what if the other nations don’t drop their tariffs on your exports? What are you going to do?

The point of tariffs isn’t to function as a negotiation strategy. If other nations want to protect their own industries, they’re just allocating resources inefficiently, and their people are going to be worse off as a result. Meanwhile, your nation’s government, which actually understands economics, will use other policy instruments such as taxation to keep the price of your exports down. It’s a bold move. 

In reality, there are so many variations on the free trade theory--Gibson, you’re here to tell us about the Chinese version, and even earlier than that, there was Japan, as Wallace will enlighten us.

Gibson: 

China has been championing free trade for a while now, and it pops up in every keynote speech Xi has made since he laid out the ‘China Dream’ in 2012.

“Pursuing protectionism is like locking oneself in a dark room. Wind and rain may be kept outside, but so is light and air... No one will emerge as a winner in a trade war.”

That was the stunning proclamation by the General Secretary of the Communist Party of China, Xi Jinping, at the first appearance by a Chinese leader at the capitalist uber-gathering that is Davos, earlier this month.

Heads turned at that. Much ink has been spilled on the meaning and consequences of the speech. The general consensus about why he said it is that it was directed at Trump’s ‘America First’ principle, which was voted in on a protectionist platform.

But Davos was not the first time Xi has said it. 

So what does China mean by free trade?

First, a look at what China has been doing. The General Secretary was responsible for an impressive economic reform plan circa 2013. But it hasn’t been the case in practice. As some analysts have argued, China is returning to a 1950s-inspired system of increased state involvement. It has effectively shut itself off to foreign companies with discriminatory prosecutions, increased state-directed investment, partially re-nationalized state enterprises and recombined state businesses into formal monopolies. 

On top of this, a number of national security laws and regulations have been put in place which prevent foreign companies from doing business with state enterprises.

So this is the gist of Kevin’s article -- different strokes for different folks. For China, Xi’s liberal economic policies come with strong nationalist control valves. 

China, in short, is moving further away from a domestic economy that is compatible with a rules-based, open trading regime that is at the core of the TPP.

If we combine China’s idea of free trade, with its ‘valves’ for command and control of each nation’s interest, we get a "free" trade which comes about from the formation of nationalist (I hesitate to use fascistic) government or corporate conglomerates.  

So a corporatist or nationalist regime dominated by a small number of participants - doesn’t that sound familiar? Shudder.

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