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How Trade with China Threatens Western Institutions

The Economic Roots of a Political Crisis

How Trade with China Threatens Western Institutions

Is free trade good? Simple models say that it is. It unambiguously increases economic surplus on both sides of the relationship. What's the problem with China?

Simply put, economic models are too moralistic. They're not hedonistic and solely focused on money as one might think from a principles textbook. Under the surface, morality reigns supreme. After all, there is no theft, coercion, deception, or ulterior motives. Is that how the world really is? If you think so, just wait a little while and reconsider. I think simple trade models are good, but incomplete.

My book evaluates the institutional environments of China and the United States, and the West more broadly, and how they affect their trading relationship, with specific emphasis on intellectual property theft and other allegations of unfair competition. Put yourselves in the shoes of a tech-intensive American company that wants to increase its market. You may want to enter the massive and hopefully lucrative Chinese market, but you know your IP won’t be yours for long. Maybe it isn’t worth it. But what about your American competitors, with similar IP? Maybe they will enter the Chinese market, and you will lose your competitive advantage anyway when Chinese firms steal your competitor’s similar IP. You’ve lost out either way, but your American competitors reaped in profits in China, at least for a little while, compounding your loss. The incentive – everyone enters the Chinese market.

Would this be so bad if IP were the only issue? That’s contentious and debatable. Though I support IP rights and think they are good for economic growth, that view is far from universal. Suppose IP doesn’t matter. The economic and political characteristics of the two countries affect the balance of power in their trading relationship, with ramifications far beyond jobs and output. Chinese firms are always connected to the government, even if they’re nominally privately owned. China’s leaders have anti-Western political ambitions, and they have no compunction about using Western technology to accomplish their aims. Trade with China isn’t just about profits and surplus on both sides; it is about geopolitical strategic advantage.

The major theme of this book is China’s ability to “free ride” on Western institutions through intellectual property theft and extortion. This free riding is far more than just infringing patents and reaping profits; it creates a combination of incentives for political pressures in the West that diminish the free market and liberal Western values, while simultaneously increasing malign Chinese influence. American firms that do business in China don’t want to lose their profits, so they become compromised when Chinese influence matters in the American economy. They lose their incentive to support policies that may be pro-American and pro-Western more broadly, and my book explains it at great length. The result is the classic result of free riding – underprovision, or degeneration, of the Western institutions that made the West prosperous and free. These institutions include the rule of law, free markets, and freedom of thought and expression.

At the same time as American institutions degenerate, China’s economic might, military prowess, and global soft power increase, often with deleterious effects for freedom and free markets. This book is distinctive because it integrates public choice ideas about economic institutions, state action, and strategic behavior into international trade. It also takes account of the economic characteristics of China and the West and explains why they present a situation that is fundamentally different from other trade disputes. Institutions and political influence are central to this book’s analysis of trade, which can be more dangerous and more disguised than the welfare gains from trade. Providing a concise and lucid distillation of pressing issues, this book is critical reading for scholars studying trade with China and its effects on both global and Western innovation, economic output, soft power, and freedom more broadly.

© 2024 by Robert Gmeiner

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