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The Sounds of Saber-Rattling Against China

Originally published in The Boston Globe

January 27, 2012
Edward Glaeser (Glimp Professor of Economics, Harvard University)

President Obama celebrated the Year of the Dragon by "announcing the creation of a Trade Enforcement Unit that will be charged with investigating unfair trading policies in countries like China." Mitt Romney wants to begin his presidency "by designating China as the currency manipulator it is."

We couldn’t impose our will on Beijing when Douglas MacArthur led an army toward the Yalu River, and we have far less power today. American consumers will pay the price for trade sanctions on China, and intemperate action will ensure Chinese opposition in other vital areas, such as containing Iranian nuclear ambitions.

Would-be presidents have been twisting the dragon’s tail since 1950, when Robert Taft accused the Truman administration of "building up" the Chinese Communists. As candidates, Presidents Kennedy, Nixon, Reagan, Clinton, and George W. Bush all wanted tougher China policies. Fortunately, pragmatism usually won out, and cooperation ensued. Nixon’s rapprochement with Beijing created a potent partnership against the Soviet Union. China is now America’s second-largest trading partner (after Canada), and the largest holder of US government debt.

China, with its massive trade surplus and a political system that disturbs many Americans, is an easy political target. During the first 11 months of 2011, China exported more than $366 billion worth of goods to America and imported less than $95 billion of American goods. China’s critics argue that this trade surplus reflects Chinese policies - the artificial undervaluing of the Chinese currency and Beijing’s failure to protect intellectual property rights.

I wish more freedom and stronger property rights for all nations, and American exporters would benefit if the Chinese currency increased in value. But nothing in the history of US-China relations suggests that the Chinese are paper tigers who will fold if we start talking tough. And actually imposing tough trade sanctions on China is likely to create more cost than benefit for the United States.

Trade sanctions are a double-edged sword that hurt not just Chinese manufacturers but also US consumers. Shoppers at Target and Walmart benefit from inexpensive Chinese goods - even if low costs reflect currency manipulation. The creative minds at Apple can produce affordable iPads by assembling them in China. Environmentalists should cheer cheap Chinese solar panels - even if Chinese subsidies help make them cheap.

Chinese workers often do labor for low wages under harsh conditions, but that is almost always true in poorer countries. Tariffs on China will reduce demand for those workers, which will make their conditions worse, not better. Indeed, conditions in China will improve as integration into the world economy brings greater prosperity.

While many arguments for slapping tariffs on Chinese goods are essentially emotional, a few are more substantive. For one, as Alexander Hamilton famously argued, tariffs can encourage the growth of infant industries. But America can also encourage growing industries without harming American consumers, by investing in basic research and education.

Another argument is that tariffs can, in principle, protect workers from trade-related dislocation. Economists David Autor, David Dorn, and Gordon Hanson found that US manufacturing employment between 1990 and 2007 fell more in geographic areas dominated by industries that compete with Chinese manufacturers. But even if we impose tariffs on China, expanding industrial sectors in countries like Brazil, India, and Vietnam will sell more in America; restricting Chinese imports will rearrange our global suppliers rather than re-energize American manufacturing. Educating Americans to compete in a global market is a far more sustainable solution to our trade problems than retreating behind tariff walls.

Accepting that America has limited options on China may feel unsatisfying to many voters. But punitive trade policies are particularly dangerous because the world’s second-most powerful nation can easily strike back. Chinese purchases of vast amounts of American debt - part of the country’s alleged currency manipulation - help keep our interest rates low. If China dumped US securities, the federal government’s fiscal situation would go from bad to dire.

Besides, without Chinese help, we have little hope of using non-military options, like trade embargos, to force change in Iran and North Korea. And as long as China buys its oil, Iran doesn’t need the United States or the European Union. A US-China trade war practically guarantees a nuclear-armed Iran.

Politicians may enjoy appealing to popular anti-China sentiment, but America’s interests demand cooperation, not conflict. Our elected leaders need to negotiate the best deal possible for America, but that won’t be won with name-calling, saber-rattling, or trade sanctions.

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