There is no doubt that China’s role in the WTO has significantly changed the game of international trade for all players. 2012 marked the ten-year anniversary of China’s entry into the WTO — an event which greatly expanded the flow of international commodities and capital while flooding markets with cheap manufactured goods.
According to classical economic theorist Adam Smith, everything we know about economics, trade and commerce tells us that trade is beneficial and that we ought to minimize tariffs and trade barriers. Therefore it would seem logical to assume that China’s introduction to the WTO would benefit all nations involved with the WTO, right? Adam Smith, meet the paradox of trade.
As great as free trade sounds in theory, there is a practical element in every political arrangement. In order to be admitted into the WTO, China was forced to relax over 7,000 tariffs, quotas, and other trade barriers; this was certainly not the easiest thing to do for a market that hosts a labour force of 780,000,000 workers (more than India and the U.S. combined). The smallest hiccup in capital or commodity flows could easily be extrapolated to devastation on an unprecedented scale. As a comparison, at the Great Depression’s peak approximately 30,000,000 Americans were out of work (for an unemployment rate of over 20%); in China, 30,000,000 jobless would translate to a mere 3.8% unemployment rate.
So why join the WTO? Why expose a developing economy to the pressures of developed-world competition? Well, that’s where the ‘political’ aspect of political economy comes in. One major advantage China has over other WTO nations is its command economy: with the capacity to organize industry from a centralized perspective, it can — to some degree — create its own luck. In the last decade alone, China’s manufacturing industry has tripled, while the American manufacturing industry has remained relatively stagnant. It is not with higher-technology industries, such as pharmaceuticals, or information and aerospace technology, that China seeks to compete on the world stage; rather, China’s membership in the WTO has allowed its economy to shift focus from the development of higher technologies to the utilization of them.
With a unique linguistic environment and a complex regime structure, piracy, intellectual-property theft, slow implementation of WTO rules, and domestic market manipulations are not just a possibility for China, they’re a luxury. China can control its exchange rate, keeping it unnaturally low in order to suppress wages (cost of labour) and maintain a consistent level of foreign demand.
Although it is true that some Chinese economists initially feared that foreign competition would restructure industries such as agriculture and poorly-run state-owned enterprises (SOEs), the overall results have been staggering: China’s economy has continued to expand at an average annual rate of almost 10%, enjoying one of the best decades in global economic history, while its GDP has quadrupled, and its exports have almost quintupled. These are impressive results for a country ranked 91st in the world on the World Bank’s ease-of-doing-business index — a ranking well below countries such as Kyrgyzstan, Armenia, and Sri Lanka (although nine spots higher than Greece!). The Economist attributes this success to the fact that “the meddling state lets multinationals in, only to squeeze them dry of their valuable technologies and then push them out.”
Once again, we return to the concept of the paradox of trade. Certainly it is more efficient and productive for countries to allocate their resources towards industries in which they have the best comparative advantage. Of particular relevance, however, is the fact that comparative advantage is not a static concept. The British were first able to capitalize on industrialization by developing textile and other products faster and in greater quantities than ever before. But where are most Brits’ textiles produced today? Certainly not in Britain. The same can be said for any country seeking to benefit from trade and its momentary comparative advantages. If it costs five Chinese labourers to do the work of one American in the same industry (including capital costs), it is simply not in the interest of a business owner to hire American workers.
This issue is not simply a hypothetical one. The success of Chinese manufacturing has not been due to new-found markets alone; rather, it has largely come from taking market share from others. This issue is manifest in American political rhetoric: in last winter’s State of the Union address, President Obama boasted of having “brought trade cases against China at nearly twice the rate as the last administration,” while also promising to reform the tax code in order to reward firms that re-locate jobs to America (i.e. the solar-energy industry). Some economists refer to this rhetoric as ‘mercantilist’. Sure it is. But a more apt term would be ‘reactionary’. By creating subsidies for specific industries, the American government is responding to Beijing’s economic manipulations in mirror-like fashion. Both governments are seeking to protect domestic interests, while maximizing market accessibility and profits.
The induction of China into the WTO has undoubtedly made the international playing field much more competitive. Is it unfair for Chinese industries to take jobs away from hard-working Americans? The answer depends on whether you ask this question in Shanghai or Boston. The paradox of trade looms wherever two competing economies seek to do business with one another. Like the old saying about free lunch, there really is no such thing as ‘free’ trade.