The United States and China have traded since the early days of our republic, but only recently has the scale of that trade become a political issue. More than any other point, Donald Trump’s rhetoric against outsourcing to China gave him the blue-collar Midwestern votes that made up his margin of victory in 2016. His election was a break with the generation-long bipartisan consensus that more and freer trade is better, whether the trading partner is a liberal democracy that respects the rule of law or a communist dictatorship where unfree people labor in unsafe conditions for government-suppressed wages.
Even to call trade with China “free” is a misnomer. Besides the minor tariffs still in place, there is also an uneven use of non-tariff trade barriers. Chinese goods enter our markets cheaply and freely because we agree to follow our agreements, our laws, and the rules of the World Trade Organization (WTO). Our goods, on the other hand, are subject to arbitrary restrictions by the communist government, while Chinese companies and government routinely infringe our intellectual property rights. The high hopes of free trade have been replaced with humiliation and decline.
Free trade with unfree nations smells like a conspiracy: the rich get richer by paying peanuts for production, while blue-collar workers lose their jobs and are bought off with cheap goods and more welfare. The truth is not criminal, just criminally stupid.
In classic American broad-mindedness, when our system won the Cold War, we bent over backward to befriend our former enemies. Free trade would lead to a prosperous, freer China, the thinking went. We thought that lowering our guard would turn a foe into an ally. Instead, the American worker just got sucker-punched.
The Rare-Earth Dispute
One of the best examples of the perils of this uneven trade is the dispute over rare earth elements. Rare earths—a group of 17 different elements—are plentiful, but difficult to mine and environmentally hazardous to process. In recent years, rare earths have become more important, as many are used in modern electronics and military and high-tech applications.
At present, about 80 percent of the world’s production of rare earths comes from China. That undoubtedly suits China just fine, and the western companies that have outsourced industrial production there don’t have a problem with it, either. After all, if your iPhone comes from China, why shouldn’t its components?
But China’s dominance of the field has other effects. While the United States once led the world in rare earth production, we now import the vast majority of these minerals from China. The loss in mining jobs is bad enough, but the extreme concentration in the field means that China essentially controls the world’s access to a vital industrial and military resource.
Free-market conservatives confronted with a situation like this one usually laud the efficiency gained by trade and competition. They are not completely wrong: it is more efficient to have third-world workers in an unfree country mining hazardous materials. Mining is a dirty, dangerous job: why not let someone in a country with terrible environmental laws and lax workplace safety rules do it?
If rare earths were only used for toys and video games, that might be a financially acceptable albeit morally dubious answer. The military applications, though, make this a much bigger problem. Once China achieved a near-monopoly on rare earths, their position was ripe for abuse.
And, wouldn’t you know it, they abused it. Between 2009 and 2012, China drastically reduced its export of rare earths and two other important metals, tungsten and molybdenum. In a free economy, that would encourage production in sources outside of China, where the artificial scarcity Beijing imposed would make it worthwhile to produce at higher prices.
In 2012, U.S.-based Molycorp, attracted to the higher prices that resulted from the Chinese government’s efforts to boost profits by restricting REE [i.e., rare earth elements] exports, made plans to ramp up domestic REE production, investing nearly $800 million in state-of-the-art mining operations in California. At the moment when the project was poised to succeed, China flooded the market with REEs just long enough to knock Molycorp out of the market. After its Chapter 11 bankruptcy reorganization, Beijing is allowing Molycorp to continue operations in China. But once again, the U.S. has no domestic REE production.
This anti-competitive behavior in a domestic company would earn an investigation by the Federal Trade Commission (FTC). In the international economy, the American government’s options were more limited. The Obama administration, joined by Japan and the European Union, filed a complaint against China in the Dispute Settlement Body of the World Trade Organization (WTO).
America won its case, but the Molycorp mine in California was still bankrupt. In 2017, the rare-earth mining assets were sold to a consortium of buyers that includes Shenghe Resources Holding Company, a Chinese firm with ties to the PRC’s government, according to mining executives quoted in IndustryWeek. The Chinese government broke the rules of the WTO and still came out on top.
One of Many Violations
The rare earths industry is one of the more egregious instances of a non-market economy manipulating the markets, but it is far from the only one. The problem began when the free nations of the world agreed to admit China into the WTO in the first place. The WTO grew out of the General Agreement on Tariffs and Trade, a post-World War II attempt to rationalize trade and reduce barriers to it. As far as it concerned trade between developed nations recognizing the rule of law, it was a great success.
China joined the WTO in 2001. The organization’s press release from that day is full of hopes for expansion of “its rules-based system” that, in retrospect, look naive. “As a result of the negotiations,” the press release reads, “China has agreed to undertake a series of important commitments to open and liberalize its regime in order to better integrate in the world economy and offer a more predictable environment for trade and foreign investment in accordance with WTO rules.”
The specific promises are even less believable 18 years later:
China will provide non-discriminatory treatment to all WTO Members…many of the restrictions that foreign companies have at present in China will be eliminated or considerably eased after a 3-year phase-out period. In other areas, like the protection of intellectual property rights, China will implement the TRIPS (Trade-related Aspects of Intellectual Property Rights) Agreement in full from the date of accession.
Many of these changes have been made in Chinese law, but in a communist country, the law matters less than the will of those enforcing it. Intellectual property rights of foreign nations are routinely ignored, and counterfeits from China are sold around the world with the tacit acceptance of their government.
China also ignores environmental and occupational safety laws while banning independent trade unions from organizing. In a country that respects the rule of law, these things have been judged to make the marketplace more humane. They also make it more expensive to do business, but most people accept that tradeoff. China routinely ignores what laws it does have and squashes any independent source of power like trade unions or industry groups that might challenge the state to change.
Trade With China Is a Rigged Game
China’s accession to the WTO came with the expectation that China would be a “market economy” before very long. These actions show that it has not, and has no intention of ever doing so. Even so, we continue to trade with China on unfavorable terms, a reflection of the consensus among bipartisan elites that free trade benefits everyone, with little or no tradeoffs. The rare earths dispute shows how untrue that is.
Conservatives have recently been transfixed by a dispute between Sohrab Ahmari and David French over whether the liberal democratic system will allow social conservatism to co-exist with the values of the secular left when the secular left increasingly refuses to play by liberal democracy’s rules. A similar argument needs to be had about free market competition with non-market economies that are just as lawless in their pursuit of victory. Conservatives have long fought for greater market efficiencies, but we must now ask ourselves if that goal is worth the price.
Free traders have been very pleased to divide the debate between two sides: those who want to trade with the world, and those who want to keep out all foreign goods. It is a false dichotomy between absolutes. In between, there are many who would be happy with trade, provided it were among free nations. In a system where all involved can be trusted to obey the rules, and where violations can be punished with more than a slap on the wrist, trade can improve all nations’ prosperity.
But a game where only one side plays by the rules is—and there is no other way to say this—rigged. Competition among equal parties is fair and free. If a factory in one state loses out to another, so long as no government’s thumb is on the scale, the result is just. Everyone follows the rules. May the best company, and the best workers, win.
Compare that to competition with an unfree country’s manufacturers. Is a factory in China polluting in violation of their laws? We have no way of knowing. Even if we did, there is little we can do about it when their court system serves only the will of the Chinese Communist Party.
Are their factories working cheaper because they are unsafe? Likely, but again there is no justice system that will remedy it. There are no independent unions to fight for work rules that protect people’s health, nor for increased wages like those in the developed world. China pretends to be a worker’s paradise, but in reality, it is a billion-member factory town.
Killing Ourselves With Kindness
This month in The Atlantic, Reihan Salam argued normalizing trade with China was a mistake from the beginning. Salam dates the problem to a year before China’s WTO accession, when Congress extended “permanent normal trade relations” (PNTR) to China, rather than annually renewing most-favored-nation status. The results were stark:
The annual battles over whether or not China merited MFN status naturally brought human rights issues to the fore, and gave voice to champions of the Tibetans and other marginalized, and sometimes brutalized, minorities. The deepening of economic ties that followed PNTR had the opposite effect—rather than draw attention to all the reasons the U.S. might want to be wary of further entanglement with China, it greatly enriched those who profited from that entanglement.
We have now locked ourselves in an embrace with a corrupt regime, and it has not been to our benefit economically or morally. The rare earths trade has been one of the worst examples of how Red China has used our openness against us, but it is far from the only one. Now, bound to a hostile nation that grows in power every day, we have outsourced so much of our economic machinery to them that business leaders are heard to say that reshoring manufacturing is “impossible.”
It is not impossible, but it requires hard work. Congress—yes, Congress—must reassess the ease with which unfree nations are granted access to American markets. The entire international trade structure of the WTO has become an unequal treaty, with the United States and the rest of the developed world on the losing end.
China is familiar with the concept. Its trade with the Western world was once starkly unfair in the other direction. More powerful nations, including the United States, forced China to sign unequal treaties beginning in the 1840s. What came next was a “century of humiliation,” followed by the isolation caused by the communists’ victory in their revolution in 1949.
Our politicians may be ignorant of history, but China’s are not. American surrender on trade could cause our own century of humiliation. To avoid it, our leaders must, at last, ask the question workers across the country have asked for 20 years: has unrestricted, one-sided, free trade with China really benefited the average American community? Has ceding control of strategic resources to the enemy made us safer as a nation? After two decades of humiliation, the answer is clear.