We Bet That Trade Would Make China Free and the Bet Did Not Pay

The pitch was irresistible. Sell the world's largest one-party state some airplanes, some soybeans and a few billion dollars of everything else, and it would wake up one morning a democracy. Like a man who buys a gym membership and wakes up a marathon runner. No sacrifice, no confrontation, no hard choices, just commerce doing quietly what a century of diplomacy and two world wars had not managed to do.

Presidents of both parties bought it. Editorial pages bought it. Chambers of commerce bought it with enthusiasm, for reasons we will get to. And a generation later, the Communist Party of China runs one of the most pervasive surveillance systems on earth, has stripped Hong Kong of its autonomy, and holds an enormous slice of the world's manufacturing, having done all of it on terms the American market helped to write. The bet was that trade would change China's politics. It changed China's economy. The politics stayed where the Party wanted them.

I want to take this apart carefully, because the lazy versions of the argument are all wrong. The lazy right says trade with China was a plot by traitors. The lazy left says trade was fine and the only problem is the people who complained. Neither version holds up. What the record shows is more interesting, and more useful: a serious idea, held in good faith, that turned out to be wrong on its central point.

The idea, stated at its best

Let me state the case for the bet in terms its authors would accept, because they were not fools.

The theory, sometimes called convergence or modernization theory, runs in four steps. One, trade makes countries richer. Two, a richer country grows a middle class. Three, a middle class wants property rights, a free press and a say in how it is governed. Four, a government that denies these things eventually has to give way or be replaced. There is real history behind it. South Korea and Taiwan both grew rich under authoritarian governments and later became democracies. The idea was not invented to sell televisions.

There was a second, more hard-nosed argument. Engagement would tie China into the rules of the international system, from the World Trade Organization to intellectual property law. A country that depends on the rules will come to defend them. Whatever you think of the first argument, the second one sounded like common sense.

Nixon, and the first opening

The story starts in February 1972, when President Richard Nixon travelled to Beijing. The trip is the subject of our post on Nixon went to China and what the 1972 trip teaches about hard bargaining, so I will keep it short. The point of 1972 was strategic: use the rift between Beijing and Moscow to improve America's position against the Soviet Union. It was a bet on geopolitics, not on remaking China. Nobody in that delegation thought a handshake in Beijing would turn Mao's China into Switzerland.

The commerce came afterward, step by step, through the late 1970s and the 1980s. Then came June 1989, the crackdown at Tiananmen Square. It was a test of the theory in real time. A rising, increasingly prosperous China had produced a movement for political change, and the government answered with troops. If you were looking for a signal that the ruling party would trade market freedom for political control, it arrived then.

Washington's reaction is worth noticing. Throughout the 1990s, China's trade status in the United States was reviewed every year, under the law known as Jackson-Vanik, which tied normal trade treatment to freedom of emigration. The annual vote meant that Congress had a regular opportunity to ask what China was doing and to threaten consequences. In 1994 President Clinton separated the annual review from human rights concerns, a move that took some of the pressure out of the exercise. The tool was still there, but the leverage went soft.

2000 and 2001: the bet is placed

The big step came at the turn of the century. In 2000 Congress passed, and President Clinton signed, legislation granting China permanent normal trade relations. In plain English, this ended the annual review. China would receive the same tariff treatment as most other trading partners, permanently, with no yearly vote on whether it deserved it. Then, on December 11, 2001, China formally joined the World Trade Organization.

Supporters made two promises. Economically, American exporters would get access to a huge market. Politically, the new openness would pull China toward the norms of a free society. Presidents of both parties argued that commerce would carry ideas across the border, and that a more connected China would be a more open one.

Here is where I'd like you to think like a Republican, which is to say sceptically. The annual vote was the only leverage Congress had. Giving it up in exchange for promises of future behaviour is like paying a contractor in full before he has laid the first brick. Maybe he is honest. But you have just removed every reason for him to finish.

What the Party did with it

Fast forward and put the record next to the promises.

1. Economic growth, yes. Political opening, no. China's economy grew enormously after joining the WTO. No ruling party gave up power as a result. In 2018 the National People's Congress amended the constitution to remove the two-term limit on the presidency, putting an end to a norm that had prevented a lifetime ruler since the post-Mao period.
2. The internet became a tool of control, not a tool of freedom. In the 1990s it was fashionable to say that the Party could not control the internet. It built a system of filtering and surveillance instead.
3. Hong Kong's autonomy was ended. The 1997 handover came with a promise to preserve the city's system of freedoms. In 2020 Beijing imposed a national security law on Hong Kong, and the promise of a separate system no longer meant what it had.
4. Trade commitments went unmet in key areas. Year after year, the U.S. Trade Representative's reports on China's WTO compliance listed complaints about subsidies, restrictions on foreign firms, and weak protection of intellectual property.

That fourth item is where the economics and the national security meet.

Forced technology transfer and Section 301

In August 2017 the Trump administration launched an investigation under Section 301 of the Trade Act of 1974, a law that lets the United States Trade Representative examine foreign trade practices that are unreasonable or discriminatory and burden American commerce. In March 2018 the Trade Representative released the findings. They laid out a pattern:

• Chinese rules and practices that pressed American companies to hand over technology as a condition of doing business, including requirements to form joint ventures with local partners.
• Discriminatory licensing terms that favoured Chinese firms.
• State-directed efforts to acquire American companies and assets in strategic sectors.
• Cyber intrusions into American commercial networks to obtain information and know-how.

You do not have to like tariffs to see that the report documented a real problem. It said, in official language, that the market access America had been promised in 2001 came with a hidden price: a requirement that your best ideas go to your competitor. The tariffs that followed in 2018 were a blunt response, and plenty of conservatives have criticised them. But the findings were not partisan inventions. They were documented practices, in a document anyone can read on the Trade Representative's website.

For a closer look at the espionage side, see Nine Questions About Chinese Spying and Stolen Technology.

The strongest case that the bet worked

If you are going to argue with a serious free trader, you have to give him this part. It is a good one.

First, trade lifted an enormous number of Chinese people out of poverty. Hundreds of millions of people moved from subsistence farming to factory jobs and eventually into the middle class. If you care about human welfare, that is not nothing. It is one of the largest improvements in living standards in human history. The conservative case for free markets rests on exactly this kind of outcome, and we ought not to be embarrassed by it. Our post on The Best Antipoverty Program Ever Tried Was Letting People Trade makes the point at length.

Second, American consumers benefited. Cheaper goods stretched family budgets, especially for lower-income households.

Third, the alternative was not obviously better. A policy of isolation might have produced a poorer, angrier China with the same government and fewer commercial ties to restrain it.

Fourth, the tariffs are paid, in large part, by us. Tariffs raise prices at home, as our explainer on who really pays a tariff, following the dollar from dock to shelf shows. A hard-headed reset has a price tag, and honest advocates say so.

Put those together and you get a defensible position: trade helped people and did not do what it promised politically, but trade was not the villain.

The answer

I accept most of that, and it does not rescue the bet. Here is why.

The question was never whether trade makes people richer. Of course it does. The question was whether trade with this government would change the government. On that, the evidence is plain. The Party took the money, the technology and the market access, and it never loosened its grip. Wealth did not weaken the Party. It funded the Party.

Second, there is a difference between trade and the terms of trade. Free trade among open economies that follow the rules is one thing. Trade with a state that subsidises its champions, steals know-how and punishes foreign firms that cross it is not free trade in any sense Adam Smith or Milton Friedman would recognise. Calling it "free trade" and defending it on those grounds is a category error. Even Reagan, who loved free markets, was never a purist about it, as our post Ronald Reagan was no free-trade purist, and his record proves it explains.

Third, the costs were not spread evenly. The gains were broad and thin: slightly cheaper goods for everyone. The losses were narrow and deep: whole towns that built furniture, textiles and electronics. Economists who studied the effects of the surge in Chinese imports, among them David Autor, David Dorn and Gordon Hanson, found that regions more exposed to the competition lost manufacturing jobs and recovered slowly. The people who gave up the most were told to retrain. Some did. Many did not. The family that lost a paycheck in 2003 does not feel better because a television got cheaper.

Fourth, the strategic cost was never priced in. When you build your supply chains around a government that is also building a military to rival yours, you have handed it a lever, as surely as you would by letting it hold the keys to your power grid.

A hard-headed reset, without fairy tales

So what should we do? I will not pretend to a perfect answer. But a serious conservative position has a few parts, and it begins with admitting that decoupling is not free.

1. Sort goods by how much they matter. There is a difference between a toy and a microchip. Concentrate protection and caution on the sectors that bear on national defence and critical supply, and be relaxed about the rest.
2. Insist on reciprocity. If a Chinese company can buy into the American market, an American company ought to be able to do the same in China, on the same terms. That is the principle behind laws such as the Foreign Investment Risk Review Modernization Act of 2018, which updated how we screen foreign purchases.
3. Work with allies. A tariff that one country applies alone is a tax on its own people. A rule that a bloc of allies apply together is a market.
4. Rebuild the home base. Domestic production and trusted-partner supply chains cost money. If we want them, we have to be willing to pay for them and to clear away the permitting and regulatory obstacles that made building here so hard. See seven trade myths both parties repeat, tested against the record for the myths on both sides.
5. Keep the cost honest. A policy that raises prices should be explained to families in plain numbers, not in slogans.

For the larger frame, the fact that trade has always been a tool of statecraft and never only economics, read Trade Is Foreign Policy and Every President Has Treated It That Way. And if you want the three big theories laid side by side, see free trade, tariffs or managed trade, three theories side by side.

The bottom line

• The bet that trade would make China free was made in good faith by serious people of both parties, and on its central claim it lost. The economy opened. The politics did not.
• Giving up the annual review in 2000 traded away Congress's only regular leverage for promises of future behaviour. Do not make that trade again.
• Trade itself is not the enemy, and Chinese families are not the enemy. The Communist Party's practices are the problem, as the 2018 Section 301 findings documented.
• A smart reset sorts goods by strategic importance, demands reciprocity, works with allies, and tells American families what it costs.
• When a politician says trade will reform a government, ask for the evidence, and ask what he will do the day it does not.