Economic Nationalism and China: The Right Issue for 2018 and 2020?

Economic Nationalism and China: The Right Issue for 2018 and 2020?

I just finished up this Bloomberg article on Steve Bannon about his “war” on the Chinese as part of his economic nationalism policy agenda.

The key quote from Bloomberg:

In Bannon’s view, China is harming the U.S. by engaging in unfair trade practices, such as the forced transfer of U.S. technology to Chinese companies. While many experts agree, Bannon has a more dire view of the consequences. “There have been 4,000 years of Chinese diplomatic history, all centered on ‘barbarian management,’ minus the last 150 years,” he says. China’s historical disposition toward trading partners, he contends, is exploitative and potentially ruinous. “It’s always about making the barbarians a tributary state,” he says. “Our tribute to China is our technology—that’s what it takes to enter their market, and [they’ve taken] $3.5 trillion worth over the last 10 years. We have to give them the basic essence of American capitalism: our innovation.”

Bannon’s analysis of Chinese history may be glib, but his points about technology transfer are not. China — more than any other country — has built an economic apparatus designed to outright steal American intellectual property, and American politicians have been asleep at the wheel for decades in confronting this problem.

This “learning model” of state economic development is hardly novel. Korea and Taiwan are perhaps the greatest users of this strategy in the twentieth century, having constructed an industrial policy focused on science and technology learning that allowed those two countries to become electronics powerhouses. Their rise was not inevitable, but rather the deliberate work of government and business leaders.

China has in many ways copied this playbook, updating it for the internet age. Where before you had import substitution of goods, now China effectively uses the Great Firewall to block Google, Facebook and other American internet giants from the mainland. These are some of the largest companies in the world, and they don’t have any access to the single largest market (by population) by dictate of that market’s government.

If China were 20 million people, I don’t think we would hear much of a peep about this dynamic. The challenge is that China has 1.38 billion people and the economy to match. When China copies technology, it doesn’t build an electronics industry, it eats it.

I believe in free markets, but only when they are free and all players play by the rules. China doesn’t just flout the rules, they actively cheat. And so the U.S. has a painful choice: renege on our commitment to free markets and protect our technological edge, or stick with free markets and learn that we eventually will have nothing to trade with the rest of the world.

To me, this is a powerful issue going into the 2018 and 2020 campaigns. The effects of China’s policies are no longer ephemeral, but are having a sustained, devastating effect on cities throughout the midwest and the south. The factory jobs that once replenished the wealth of the middle class have been decimated, only intensified by increasing automation.

Congressmen and the executive branch are starting to figure out that confronting this economic challenge from Asia is a potentially winning strategy with voters. The Wall Street Journal, for instance, profiled North Carolina Republican congressmen Robert Pittenger and his work to block Chinese investment in the U.S. by lobbying the Committee on Foreign Investment in the U.S. for stricter standards on acquisitions. Pittenger won his last Republican primary election by 133 votes.

The problem remains that while the U.S. has sent warning shots — blocking an acquisition here and threatening to declare China a currency manipulator — it has failed to take any sustained action that might ameliorate the problem or show the Chinese leadership that the U.S. is serious in protecting its intellectual property. The question going forward is how much will the domestic campaigns push America in confronting this global problem more aggressively. My guess — and hope — is that it will.

Photo by Bernd Thaller used under Creative Commons.