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Scott Powell / April 8, 2019

Chinese Trade Talks Will Likely Yield Only Some of What the U.S. Wants

U.S. negotiators should be patient and recognize the long-term advantages that our country has.

The U.S. and China are edging closer to finalizing a trade deal that should end the tariff penalties at the heart of a year-old trade war.

But a comprehensive deal that includes remedies for China’s theft of intellectual property and forced technology transfer from American companies doing business in China may not be in the cards in closing out this round of trade talks.

When China joined the World Trade Organization in 2001, it was granted “developing country” status, which allowed it to nurture infant industries by levying high tariffs on imports from the U.S. and Europe even while China benefited from low tariffs on its exports into those same countries.

In this March 28, 2019, photo, President Donald Trump talks with reporters before boarding Marine One on the South Lawn of the White House in Washington for the short trip to Andrews Air Force Base in Maryland. The Trump administration on Wednesday will resume negotiations with China toward ending a trade war that has deepened uncertainty for businesses and investors and dimmed the outlook for the global economy.

Now that China’s economy is the second largest in the world after the United States — having increased its GDP nearly 10-fold since 2001 — China can follow the precedent of South Korea and other Asian tigers, who lowered their tariff rates once their export-led policies delivered high economic growth and lifted their people out of poverty.

Getting to yes with China even with a less than optimal deal can be more easily swallowed when we take the long view of David Ricardo’s 1817 theory of comparative advantage, which remains relevant today. Comparative advantage reminds us that nations benefit from trade by producing and exporting products and services in which their advantage is greatest or their disadvantage is least.

The understanding of comparative advantage has grown from the concept of total factor productivity, or TFP, developed by economists in the last 50 years.  TFP initially focused on the education and specialized knowledge of the workforce and the technological advancement of the workplace.

While China has recently surpassed the U.S. on total patents granted and is moving upstream in technologies such as artificial intelligence, its TFP is a shadow of what we enjoy in the United States. China’s primary comparative advantage remains large scale cheap labor suited for consumer product manufacturing.

America’s comparative advantages are many and include being world leader in high tech innovation and manufacturing, having six of the 10 top universities in the world, and eight out of the 10 most valuable brand names in the world.

Countries with high TFP are all at the top of the Index of Economic Freedom. They enjoy greater prosperity because of the aforementioned contributing factors and institutions that enable the free market to thrive with innovation that provides solutions to old and new problems. High TFP is also tightly correlated with healthier societies and cleaner environments — two essential measures of welfare.

This current round of trade talks should result in tariff reductions with attendant benefits to both sides. But it’s less likely for this agreement to solve the majority of our problems with China in the protection of U.S. trade secrets and intellectual property rights. And so long as China denies involvement in national security-related technology theft and espionage, progress in addressing those problems will be elusive.

The good news is that if we keep the long view — making incremental success in subsequent trade negotiations with the help of the WTO — while avoiding protectionism, vigilantly protecting and nurturing all elements of our total factor productivity advantage, and following the essential requirements of comparative advantage in trade, America’s future will likely be as bright as the past.

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