China Trade — Without Guilt - It is logical, moral, and right

National Review, May 14, 2001 by Richard Lowry

It's quite an accomplishment to do the bidding of U.S. corporations and accept Marxist premises at the very same time. But this is the nifty trick pulled off by advocates of free trade with China, at least according to their critics. Congress will vote again this summer on granting "normal trade relations" to China. Passage of NTR seems all but certain. But, especially in light of China's recent eleven-day experiment in taking U.S. servicemen hostage, the trade vote will be the object of kitchen-sink criticism from left and right, alleging that corporations bought the vote with soft-money donations, that it is an expression of a crude economic determinism, even that it represents an act of "appeasement" worthy of Neville Chamberlain at his Hitler- coddling worst.

China trade risks becoming the least reputable measure to win wide congressional support since the bankruptcy bill (which passed the Senate in March by a 85-15 vote, but is still portrayed as a practically medieval effort to bleed the poor). This is a shame. Trade with China has self-interested, and not particularly subtle or savory, backers in the business community. But this says nothing about the merits of the free-trade measures in question. Economic engagement with China serves to foster pockets of liberty in China, and possibly to undermine its regime at its roots. What critics-a collection of union protectionists and human-rights advocates on the left and economic nationalists and neoconservative defense hawks on the right-offer in its stead is a policy of economic isolation that has failed elsewhere, and would be applied to China mostly as a matter of moral dudgeon: irritable gesture masquerading as strategy.

The China-trade debate features a parade of initials. For more than a decade, China was granted "most favored nation" (MFN) status after an annual debate on Capitol Hill. Last year, the MFN debate became the NTR debate, in a change of nomenclature to reflect the fact that "favored" trade status is enjoyed by almost all nations in the world and therefore is more appropriately called "normal." Meanwhile, China has moved closer to joining the World Trade Organization (WTO). Members of the WTO aren't permitted to conduct annual reviews of each other's trade status, so when China joins this free-trade group, it must be granted permanent NTR (PNTR) by the United States (unless the U.S. wants to risk WTO sanctions). As part of its WTO entry, China in 1999 agreed to cut tariffs and restrictions on American agriculture, industrial products, banking, insurance, telecommunications, and movies, and to make other economic reforms.

This is good news, and not just because Coca-Cola executives have visions of 1 billion potential smiles. The question of how to change China is essentially the question of how to starve and make irrelevant the biggest welfare state in the world. As its ideology has collapsed into a shell of its former self, the Communist government has turned to economic growth as the way to preserve its legitimacy. But this is a gamble, as sustaining growth means allowing private initiative, establishing the rule of law, and tolerating the creation of a middle class. So, the Chinese regime is increasingly committed to the notion that it can be a little bit pregnant, that a Communist dictatorship can, more or less, depend on the workings of the free market for its support.

It's a risk. One example: As former Heritage Foundation analyst Stephen J. Yates, now in Vice President Cheney's office, has written, "State workers are forced to depend on government-subsidized benefits. Because they are not paid enough to be able to choose private alternatives, they must comply with intrusive government regulations, like family planning and controls on speech, or risk the loss of vital benefits." This means anything that creates employment opportunities outside the state sector potentially reduces this pressure point for the regime. And this has been the trajectory of development since late 1970s, when the state accounted for almost all economic output. Estimates differ on the exact figure now, but state-owned businesses are only part of the picture.

China, of course, shouldn't be mistaken for Hong Kong. Gauging the influence of the state on the Chinese economy is difficult because China's market is about as transparent as the Great Wall. The government tries to get its tentacles into any sizable economic enterprise, and many shrewd entrepreneurs include bureaucrats in their businesses from the start for protection. Managers of a given business may not even know who owns their firm, so shadowy is this stew of crony communism and capitalism. On top of all this confusion, the regime desperately works to keep its inefficient and failing state-run businesses afloat, with loans from state banks that act as perpetual subsidies-think of the U.S. Postal Service with "Chinese characteristics."

Economic engagement with China will tend to tip this mess in a positive direction. The WTO, for instance, will open the Chinese market to Western banks. Today Chinese banks can afford their incontinent lending practices because they have a captive savings market. Chinese workers must accept the rotten deal they get from these socialist dinosaurs. But when, say, Chase Manhattan shows up, this may no longer be the case, and Chinese banks, a linchpin of the state sector, will be subject to competitive pressures. In general, trade will create, from both foreign and Chinese businessmen, pressure to establish transparent rules for economic transactions-to create beachheads, in short, for the rule of law.