How not to start a trade war

Don't pretend China is an equal to the U.S.; instead, take Barney Frank's "grand bargain" out for a spin.

By Andrew Leonard
Published December 5, 2006 10:33PM (EST)

China, writes Peter Morici, a business professor at the University of Maryland and former Clinton administration trade official, has perfected the practice of mercantilism to a degree unmatched by any nation since 18th century France. By protecting its home markets and subsidizing exports via currency manipulation, it is taking advantage of true free traders, such as the United States. Even worse, its obvious success following this strategy is inspiring other developing nations to copy its mercantilist agenda, which is why "the Doha Round of [World Trade Organization] negotiations is almost certain to fail."

The only rational response to this, argues Morici, is to fight back with tough tariffs on Chinese goods. As he has written elsewhere, "If you punch me in the nose, popping you in the jaw is not criminal battery ... Answering Chinese mercantilism with trade measures is nothing more than self defense."

The current status quo is unfair, declares Morici, noting that "the United States has opened its markets more than its trading partners." The time for such acquiescence is over.

In the wake of the Democratic midterm elections victory (a phrase I feel like I have been writing twice a day for the past month) there is a fertile environment for getting tough on trade. The sturm und drang boiling over and about all aspects of the U.S.-China trade relationship has reached hyberbolic heights. And for good reason -- there is undoubtedly no more important trade relationship in the world today. We need to make it work for both sides.

For hardcore free traders, the prospect of an all-out trade war with China, led by the likes of North Dakota Democratic Sen. Byron Dorgan, smacks of the apocalypse. For cooler heads, like Slate's sensible Daniel Gross, Republicans who have given the cold shoulder to the losers from globalization deserve at least as much blame, if not more, for the potential demise of free trade, as do newly powerful Democrats. And then there's the camp of partisans like Morici, who considers himself a devout free trader, but supports protectionism because the other side isn't playing fair.

Let us stipulate that Morici is correct -- that China isn't playing fair, that it is bending the rules at every opportunity, that it is doing its damnedest to tilt the playing field in its own favor. I guess I'd be pretty angry too, like Morici and the swelling anti-yellow hordes of China-bashers, if I considered China the U.S.'s equal.

But I don't. I don't think any country with a per capita income of $6,800 (the comparative U.S. figure is $40,100), and 600 million to 800 million peasants, can possibly be considered an equal of the U.S.'s. China's own intellectuals may just now be beginning to see their country as a semi-superpower, but facts are facts: The U.S. has no equals. It is the richest, most dynamic economy in the history of this planet.

If any country should be opening up its borders more than all the rest, that country is the United States. If you believe that the best chance for continued prosperity in the United States is a prosperous world, then you probably believe that the United States has a moral obligation to help pull the rest of the world forward.

This is the key point that keeps getting left out of the trade debate. Developing nations need a leg up. They require, as Joseph Stiglitz has persuasively argued, more access to rich-nation markets, and they have a right to protect their own markets to some degree as they strive to climb their way to parity with the developed world. There is abundant evidence, compiled by economists such as Stiglitz and Dani Rodrik and Robert Wade, that simply opening up borders and deregulating and privatizing everything in sight do not automatically work to the benefit of poorer countries that have trouble automatically allocating resources to the sectors where they might have comparative advantages.

The United States doesn't have that problem, generally speaking. But like any country that engages in trade, its population includes people who lose as well as those who gain from globalization. And it has a moral obligation to take care of those people too. Balancing out those two obligations, to the world's developing nations and to its own citizens, is the globalization nut that needs cracking.

Which is why I was heartened to learn of Massachusetts Democratic Rep. Barney Frank's proposal for a "grand bargain." Since the election, he has been meeting with representatives of the business community and proposing a deal: You give us wage increases, support for government-paid health insurance and other safety net benefits, and we'll give you free trade.

The Boston Globe reports:

Frank proposes that if businesses support a minimum wage increase and provide protection for workers adversely affected by trade treaties, Democrats would be more willing to ease regulations and approve free-trade deals. Frank also would support changes to immigration rules favored by businesses, and noted that allowing more immigrants would put needed funds into the Social Security system.

Frank casts his proposal as a way for capitalists to quell some of the populist fervor that was expressed in last week's election, when many Democrats vowed to crack down on companies moving jobs overseas.

"I'm a capitalist, and that means I'm for inequality," Frank told Boston business leaders on the morning after Election Day, in a speech about his grand bargain. "But you reach a point where you get more inequality than is healthy, and I believe we're at that point.

"What we want to do is to look at public policies that'll get some bigger share of the increased wealth into wages, and in return you'll see Democrats as internationalists ... I really urge the business community to join us."

Frank is about to become chairman of the House Financial Services Committee, a position of real power. His grand bargain is a responsible approach to dealing with inequities both globally and domestically. At first glance, it seems both fair and smart.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Barney Frank D-mass. China Democratic Party Globalization