William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.

Beijing’s state-run Xinhua news service was quick to herald the latest lobbying effort on China’s behalf launched by the Club for Growth, a libertarian organization dedicated to electing public officials who agree with its free trade ideology.  “More than 1,000 top American economists have signed a petition to urge Congress not to impose protectionist measures against
China,” read the story filed by Xinhua from Washington on August 3.

What the Club for Growth is protesting are two bills passed by the Senate Finance and Banking Committees seeking to pressure Beijing to cease its currency manipulation, a practice that gives producers in China an unfair competitive advantage both in export markets and at home.  China sets the value of the yuan by fiat, not by the market.  It is thus rather odd, and intellectually dishonest, for the Club to defend Chinese government policy on the grounds that it is somehow an example of free trade or free markets.  China’s largest banks are state-owned, as is nearly two-thirds of its industry.  The country is run by a throughly protectionist elite.  

The motivation of a gaggle of libertarian economists – in signing a petition defending the actions of a mercantilist and Communist dictatorship in its pursuit of greater national wealth and power – is hard to fathom as it defies rationality.  It is best understood as another collateral political effort by those transnational corporations who exploit libertarian “principals” and naivete to cover their own pursuit of profit – in this case as handmaidens of Beijing.  Thus the organization would be better named “The Club for Growth in China.”  As Fortune magazine has reported, among Fortune 500 executives, China is “absolutely center stage right now” – which therefore makes it the focus of the Club too.  

The petition is filled with intellectual errors, indicating it was written by the political hacks at the Club.  Certainly these should have been corrected by the scholars recruited to sign the petition.  But they are also apparently too ideologically driven to view the situation objectively.

For example, the petition states, “Over the past six years, total trade between the two countries has soared, growing from $116 billion in 2000 to almost $343 billion in 2006.  That's an average growth rate of almost 20% a year.  This marvelous growth has led to more affordable goods, higher productivity, strong job growth, and a higher standard of living for both countries.”

This is the old device of citing a misleading statistic to hide what is really going on.  U.S.-China trade grew, but the growth was and continues to be extremely lopsided.  Of the $343 billion in trade cited for 2006, only $52 billion were American exports.  $291 were Chinese exports, giving China a nearly 6-1 advantage.  No wonder the Club for Growth in China wanted to mask the dismal U.S. performance behind aggregated statistics.  And it is basic Econ. 101 that a large trade deficit slows growth and reduces job opportunities in the country that suffers it.  

In the early 1990s, globalization cheerleaders argued that “free trade” would open “big emerging markets” to American-made goods, thus bolstering domestic growth and income.  A decade of unprecedented trade deficits has turned that argument into hash. So now defenders of this academic sophistry have fallen back on the notion that “affordable goods” are the most important aspect of trade.  Yet, no argument could be more logically twisted.  Consumption is a use for wealth and income, it is not the source of wealth or income.  It is the production and sale of goods and services that generate income.  And income that is saved (i.e., not used for consumption) and invested in expanded production is what generates long-term wealth.  This is what China is doing, using the American market to transfer money across the Pacific into their economy.  Americans are being deceived into believing consumption financed by debt is the path to a higher standard of living.  That kind of profligate behavior is unsustainable as any real economist knows.  Thus, when the petition claims, “China currently supplies American consumers with inexpensive goods and low-interest rate loans,” it is marketing distorted thinking that is dangerous to America’s economic health.  

“As economists, we understand the vital and beneficial role that free trade plays in the world economy” reads the petition.  But for “understand” the signers really mean “imagine.” These economists are speaking from ideology, the dream of a harmonious world run by business calculation that maximizes global efficiency.  But that is not the world we live in.  The world remains divided into nations and communities.  People live in these societies, not in academic models.  Firms and investors operate across borders – and problems can spread across borders too (as with the subprime mortgage meltdown), but the impact is felt by real people living real lives.  Economic activity and growth are not evenly spread over across the globe.  Only a handful of major countries account for the vast majority of economic output, and they determine the destiny of the world.  

Economics as a field of study only goes back to the 18th century.  It was grounded in the connection between wealth and power.  Great Britain was its birthplace because after the Seven Years War, the British Empire expanded rapidly.  “Britain owed its new lands and international preeminence to economic sinews of power; it needed statesmen who understood this infrastructure,” argues Harvard business professor Nancy F. Koehn in her book The Power of Commerce (Cornell University Press, 1994).  Professor Koehn notes,  “The first men to call themselves political economists tried to provide such an understanding.”  But, over time, the profession became overly academic and increasingly abstract, retreating into the Ivory Tower, where more pleasing theoretical models of the world could be substituted for the real and messy thing.  

Yet, the first law of economics has not been repealed.  It is still taught to students on their first day of class, even if its uncomfortable implications are then papered over.  It is that there is never enough to go around.  Not all needs and desires can be met, thus choices must be made.  This is the economic problem of scarcity, which can be lessened somewhat over time but never solved.  Our reach always exceeds our grasp.  Even in a country as advanced as the United States, nearly everyone wants more than they have, and many needs now considered basic are not met for all citizens.  Conditions in most foreign lands are much more harsh.  

It is by the competitive process that some people get to do more than others.  They obtain more resources and put them to better use.  They build for the future and beat out others who are less capable, or less attentive.  Though business firms carry on much of this contest, their actions, both victories and defeats, affect the societies in which they operate.  It is the duty of government leaders to orchestrate events so that the bulk of victories go to their own people, to enrich their own national society.  There is no “world economy” only an “international economy,” which is an arena for commercial (and political) competition.  It is irresponsible to speak of “free trade,” or even “fair trade,” as if the outcome did not matter.  

Beijing understands what is at stake.  Thus, the regime there reinforces the advantages they have in a nearly inexhaustible pool of cheap labor with subsidies, a misaligned currency, massive intellectual property theft, the complete neglect of environmental costs, and a diplomatic campaign aimed at securing resources and markets overseas.  They are playing to win.  The Club fo Growth in China wants the United States to stand still and never impose any “retaliatory trade measures against China” that would address Chinese protectionism and tilt the odds back in America’s favor.  

Hopefully, the transparent nature of the Club for Growth in China’s petition, geared as it is to the protection of those rootless corporations in league with the Beijing regime, will repel rather than persuade the U.S. Congress.  The Currency Reform and Financial Markets Act of 2007 (S. 1677) was approved by the Senate Banking committee on a bipartisan 17 - 4 vote on August 1.  Only a few days earlier, the Senate Finance Committee voted out the Currency Exchange Rate Oversight Reform Act of 2007 (S. 1607) by an even more impressive 20 - 1 margin.  These votes indicate a growing – and fully justified – impatience with Beijing’s unfair trade tactics on both sides of the aisle.  

---