US, China & Free Trade

Abstract

It is undeniable that Chinese manufacturing has been the cheapest source of supply for global consumption since the past few decades. Supporters of Chinese trade argue that it has created a substantial benefit for both US and China. In the US it has created better profits, cheaper goods, and in China it has helped millions out of poverty. Therefore, it was in the interest of developed countries to encourage this free trade. Ardent supporter of this view was Milton Friedman. Detractors point out that the “cheapness” was achieved through government subsidy i.e. through cheap land and “incentivised” labour coupled with cheap capital. This artificial cheapness has hollowed out the American mid-west. It has led to deindustrialisation of America. Therefore, detractors argue, this kind of “free trade” must be replaced with “fair trade”. So, is free trade truly at risk? Was China’s strategy correct? I argue that it isn’t. Free trade, by itself, is not to blame. Yet, what China is doing is also improper. So, what is wrong? How can we set things right? What is China doing? How can the US respond? Free trade is a broad issue. The paper does not claim to be comprehensive repository and rebuttal of the issues involved. It merely raises one important perspective to look at free trade – the one that has not received enough mind space. The first part looks at the broad arguments of what we call in this paper the Friedman Arguments. The second part points out a few fundamental flaws why the model did not work during the last 30 years. It also highlights some coincident circumstances that contributed. The third part proposes a solution to the free trade challenge. The fourth part examines how US-China dynamics will play out. Finally, we give a short conclusion.