China vs. the US: Enduring Regret Over Trade Normalization

Welcome to Friday. Here’s a summary of the week’s news regarding the economy, the faltering expertise of leaders, and some significant policy errors from those in power.

After 25 years of engaging with China, Beijing observed this milestone by restricting its own markets. Economists continue to grapple with their inability to foresee the results of trade with China while attempting to understand why tariffs function despite expectations. Meanwhile, in Washington, Republicans seem intent on restructuring middle-class finance to support Obamacare. Progress? Perhaps, but not in a way many anticipated.

Happy 25th Anniversary of Chinaversary!

This week marks the 25th anniversary since China was granted permanent normalized trade relations with the United States, setting the stage for China’s entry into the World Trade Organization the following year. An essay commemorating this event by Senator Jim Banks (R-Ind.) appeared on Breitbart, yet the occasion went largely unnoticed in mainstream media and academic circles.

One reason for this might be that reflecting on it highlights a significant truth: normalizing trade relations with China was a monumental public policy blunder in the United States. Leaders and intellectuals once believed that fostering trade would boost the U.S. economy, promote political freedom in China, enhance individual rights, and provide new markets for American businesses.

Here’s a brief excerpt from President Bill Clinton’s remarks after the U.S. Senate approved the PNTR for China:

In exchange for normal trade relations—the same terms we offer more than 130 other countries—China would allow American products to access its markets, from wheat to cars to consulting services. You’d be able to sell in China without relocating your factory there…

The more China opens its doors to our products, the more it paves the way for economic freedom and unleashes its potential.

If China finalizes its negotiations and joins the WTO, Japan’s advanced companies will speed up its information revolution. Increased competition will hasten the decline of China’s state-run industries and encourage private sector participation. This could diminish government intervention in the lives of the people. It will empower citizens in their quest for higher labor standards, a cleaner environment, human rights, and rule of law. I believe that engagement will give America greater influence over China than isolation.

However, the facts tell a different story. To access the Chinese market, American firms not only had to produce their goods in China but also partner with local companies, leading to significant technology theft. U.S. exports to China did not expand in line with its economy. Consequently, the portion of exports in China’s GDP today stands at about two-thirds of what it represented at the dawn of this century. In contrast, U.S. exports to China were around 1.2% of China’s GDP in 1999 but have now dropped to approximately 0.8%. Over the same period, China’s exports to the U.S. grew from about 0.9% to 1.5% of the U.S. GDP, essentially flipping our trading positions.

China’s economy continues to be governed by state-owned enterprises and the ruling party. Instead of diminishing, the influence of the government over people’s lives has intensified, particularly under Xi Jinping’s concentrated leadership. Those advocating for human rights and improved labor conditions in China have faced significant backlash. Our sway in China appears to have diminished over time.

Don’t overlook the major economic disconnect we face. If only this knowledge was more broadly recognized. In the early 2000s, a near-universal consensus among U.S. economists suggested that granting access to the U.S. market would grant China liberalization, enhance freedoms, and dismantle trade barriers. Their predictions turned out largely accurate, yet there has been no public reckoning regarding this monumental failure of foresight or expert judgment.

China’s Anniversary Gift: Rare Earth Retaliation

In commemorating this significant anniversary, China has opted to reshape global trade with “Chinese characteristics,” leveraging its advantage in rare earth minerals through strict new export controls and licensing laws that extend to products containing even minimal amounts of these minerals. This move is a stark departure from the conciliatory posture China displayed during recent trade discussions in Geneva, London, and Stockholm.

No one should be surprised. State-driven economic aggression seems a fitting way for China to celebrate 25 years of manipulating Western openness.

In response, President Trump noted that the planned meeting with Xi Jinping was called off and hinted at imposing “significant” new tariffs on South Korea this month. That’s a step in the right direction. The underlying lesson here, though, is that America’s reliance on China’s supply chains remains a critical vulnerability. If this situation promotes decoupling, the Chinese government might inadvertently give us a silver lining.

Economist: Trade Still Off Base After All These Years

Even the Washington Post is beginning to concede what we’ve been saying for a while: the consensus among economists about tariffs has been fundamentally incorrect. This week, columnist Matthew Lin pointed out that forecasts of a recession and rampant inflation have faltered in light of nearly 4% growth and inflation below 3%, alongside rising customs revenues. This article marks a noteworthy shift in public discourse, as views move toward a populist perspective where trade policy is seen as a potential asset for strengthening the economy.

Will Republicans Become Tax Collectors for Obamacare?

Removing the shutdown scenario leads us to a pressing question: will we secure the Affordable Care Act’s (ACA) pandemic-related subsidies as a steadfast entitlement?

Obamacare was initially presented as a solution to cut health care expenses. Proponents claimed it would be financially self-sustaining and reduce the budget deficit without increasing federal spending. However, that hasn’t materialized. Premiums have surged, costing the program billions over the next decade.

This situation has increased the push for expanding subsidies, which intensified during the pandemic. Enhanced credits were initially labeled as temporary options to ease burdens. Now, Democrats are eager to transform Obamacare into a broad entitlement program that automatically grows along with premiums and enrollment.

Republicans oppose this on grounds of cost and principle. Yet politically, those arguments appear to be losing traction. They risk being seen as Democrat health care tax collectors, as Democrats advocate for cutting insurance premiums at the expense of Republicans arguing for greater financial burdens on households. That’s not a winning narrative.

There is a potential path forward, but it won’t come cheap. Republicans may consider strengthening subsidies for working and middle-class families while still limiting access for unauthorized immigrants, including DACA recipients and individuals under Biden’s parole. It’s also feasible to reinstate small premiums for those currently benefitting from zero payments under the system. Most voters might view a $30 monthly fee (roughly equivalent to a typical phone bill) as reasonable and align with the idea that beneficiaries should contribute something.