Trading With China: Resetting the Balance

US President Bill Clinton responds to questions 19 May at the White House after announcing his decision to grant Most Favored Nation(MFN) status to China for another year. JAMAL WILSON/AFP/Getty Images
US President Bill Clinton responds to questions 19 May at the White House after announcing his decision to grant Most Favored Nation(MFN) status to China for another year. JAMAL WILSON/AFP/Getty Images
By Ronald J. Rychlak


Not that long ago, so it seems, my politically enlightened friends complained about the United States’ trade policy with China. Why, they would ask, do we give “most favored nation” status to a country that suppresses free speech, stifles dissent, brutalizes its citizens, ignores intellectual property law, and uses slave or prisoner labor?

On the surface, anyway, they had a point.

Most favored nation (MFN) status meant that the trade terms offered to that nation were as favorable as those offered to any other nation. It represented the normal state of affairs for most of America’s trading partners. It didn’t really suggest a highly favored status, but it did mean that some nations, those without MFN status, might have unfavorable terms imposed upon them.

Tariffs were entirely possible, especially when it came to applying political pressure, and many argued that they should be used with China.

The MFN approach to trade came about because of federal legislation that was put in place in 1934. The applicable law was amended in 1951. Due to those amendments, President Harry Truman was required to suspend the MFN status of all countries in the Sino-Soviet bloc, including China. He did that on Sept. 1, 1951.

The next significant legal development came with the Trade Act of 1974. According to Manhattan Institute President Reihan Salam, writing in The Atlantic, under that law, “China was designated, alongside the Soviet Union and other socialist states, a non-market economy. As such, it could only be granted MFN status under certain preconditions. In 1980, as relations between the two countries thawed, the U.S. conditionally granted China MFN status. That status, however, had to be renewed annually, which gave China’s critics in Congress an annual opportunity to question the wisdom of doing so.”

As Salam went on to explain, throughout the 1980s and 1990s, various student groups, human-rights activists, and anti-communists argued that China didn’t deserve MFN status. Every year, they lost. The argument that usually carried the day was that by supporting trade with China, we would cause them to see the benefits of capitalism, which would propel them toward a freer economy. Unfortunately, that envisioned development never came to fruition.

The closest that the side of anti-MFN status for China came to having its way was after the 1989 events in Tiananmen Square. In April of that year, student-led demonstrations involving perhaps as many as a million protesters called for “freedom of speech, freedom of the press, government accountability, and an end to cronyism and corruption,” according to the Foundation for Economic Education (FEE). Unfortunately, the Chinese regime couldn’t tolerate such disrespect. In June (exactly 30 years ago), it launched a brutal military crackdown.

The photograph of a solitary protester standing up to an army tank became one of the most iconic images of the 20th century. Unfortunately, many protesters didn’t fare as well as the unknown “tank man” did. Censorship, obfuscation, and denial have made it difficult to ascertain the exact number, says FEE, but the Chinese regime killed at least hundreds and perhaps thousands of protesters. Many more were injured.

Following those events, legislation was introduced in the U.S. Congress to terminate China’s MFN status and even to impose additional sanctions. Ultimately, however, the new proposals weren’t implemented. The United States continued the policy of trading freely with China.

In 1998, lawmakers changed the name of MFN status to “normal trade relations.” Legally, this linguistic convention was trivial, but it had real political consequences. To argue that China ought to be treated as our most favored nation sounded bad, and it gave those who wanted to change policies within China a certain moral status.

On the other hand, to argue that we ought to have normal trade relations with China was much more defensible. The name no longer seemed to indicate approval.

Just two years later, President Bill Clinton signed a new law granting China “Permanent Normal Trade Relations” (PNTR). This new status meant there were no annual renewals, and it paved the way for China’s accession to the World Trade Organization. That, in turn, provided U.S. exporters (primarily agricultural producers) the opportunity to benefit from reduced trade barriers with China.

Prior to China’s PNTR status, there was always the threat that favorable access to the U.S. market would be revoked. That tended to keep leaders in Beijing concerned about how others perceived the nation’s behavior. It also deterred U.S. firms from becoming overly dependent on Chinese suppliers. Once PNTR was in place, however, the floodgates of investment were opened, and U.S. multinationals developed new China-centric supply chains.

U.S. companies, of course, hoped to find new or expanded Chinese markets for their products, but that didn’t happen to the extent they had hoped. For one thing, Chinese workers did not benefit from Social Security or other entitlement programs. As such, they were focused on saving money for their old age. They didn’t spend nearly as freely as Americans did.

Second, in order to gain entry to China’s market, the Chinese government required U.S. manufacturers to build plants and hire Chinese workers, often as a joint venture. Aside from shifting more jobs and capital to China, this also gave Chinese companies the knowledge of how products were made. As a result, inexpensive Chinese knock-offs of expensive American products often hit the market. When U.S. companies couldn’t compete for sales, many of them packed up and went home. The plants and Chinese counterfeits remained and were, in some cases, exported to the United States.

Actual free trade is best for everyone, but that isn’t how China has operated. While U.S. firms deal with things such as minimum wage, Occupational Health and Safety Regulations, and all types of environmental laws, China uses prisoners for labor. In fact, over the past decade, several cases have been brought to light that amount to forced labor in China. Moreover, working conditions are poor, and (despite Al Gore’s praise) China is now the world’s leading producer of carbon dioxide emissions.

Free trade in that circumstance brings in low-priced products, but how can companies compete? Perhaps more importantly, how can U.S. workers compete?

When I studied economics in college, the answer to trade imbalance was that eventually, the dollars sent overseas have to be spent back in the United States. So, the argument went, there was nothing to worry about. Given their penchant for saving, however, Chinese investors “spent” their dollars by buying U.S. real estate and equity in American corporations. That wasn’t in the plan, and it certainly created some concern.

Moreover, the promised freedom in China didn’t develop. Many Western intellectuals and their Chinese counterparts have noted that China today is less free than it was a decade ago. Free speech, dissent, and religion have all been suppressed by the regime. In fact, the Chinese regime recently launched perhaps its strongest censorship campaign ever, right around the 30th anniversary of the Tiananmen Square massacre.

So what is the relevancy of this today? In 2018, the Trump administration began negotiating with China to re-work structural issues and re-balance the U.S.–China trade relationship. According to the president, China has been able to “rip off the United States” to the tune of $500 billion a year. Just recently he repeated his threat that if China is unwilling to make progress in these negotiations, he’ll continue to impose tariffs on billions of dollars of Chinese goods.

In other words, Trump is threatening to employ a technique that used to be favored by the politically enlightened to pressure a government that suppresses speech, stifles dissent, brutalizes its citizens, ignores intellectual property law, and uses slave or prisoner labor. It seems that there is little reason to complain, unless the complaint is simply about the leader who is using this technique.

Ronald J. Rychlak is the Jamie L. Whitten chair in law and government at the University of Mississippi. He is the author of several books, including “Hitler, the War, and the Pope,” “Disinformation” (co-authored with Ion Mihai Pacepa), and “The Persecution and Genocide of Christians in the Middle East” (co-edited with Jane Adolphe).

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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