In recent years, there has been increasing pressure to isolate the US from any sort of contact with the Chinese economy. The latest sector to be affected is healthcare, where there is a proposal to ban US drugmakers from contracting out various tasks to Chinese firms. Here’s The Economist:
The knock-on effects for the Chinese firms’ American customers are also likely to be profound. Start with the contract manufacturer-researchers. WuXi is to big pharma what Foxconn, the Taiwanese assembler of iPhones, is to Apple—a high-quality supplier entrusted with sensitive ip. It says its clients include the world’s 20 biggest drugmakers. Dozens of American pharma firms have notified investors that, should the BIOSECURE bill pass, they may be unable to meet demand for their products or to complete clinical trials on schedule. . . .
Jefferies, an investment bank, reckons that replacing Chinese capacity would take big Western drug firms at least five years and almost certainly end up costing more. For biotech startups, which tend to rely on Chinese partners with proven records to save time and money on research and manufacturing, the BIOSECURE bill could be an existential threat. According to a survey conducted in March by BioCentury, a consultancy, biotech bosses and their investors expect a slowdown in drug development in the event of its passage.
It is difficult to evaluate “national security” arguments because almost anything might conceivably have some sort of indirect link to that amorphous concept. Thus does weakening China make war less likely, because our adversary is less powerful? Or does it make war more likely because rich countries have more to lose from fighting?
One thing seems clear. The track record of nationalism is much less promising than the track record of internationalism.
READER COMMENTS
Robert Benkeser
Apr 26 2024 at 12:51am
Sometimes free trade does end up hurting us. Desperate American companies built factories in the USSR only to see their IP stolen and used to build up the USSR military defense industrial base. Obviously, we could not have known for sure then that the USSR would be an adversary. There were warning signs, however. One being that the USSR was a totalitarian dictatorship.
Today, we know that China is now overtly helping Russia prosecute its war in Ukraine. So we don’t really have to guess whether China is hostile to American interests.
Jon Murphy
Apr 26 2024 at 8:23am
Citing the USSR is a strong bit of evidence against economic nationalism. They stole all this IP, yet had no clue how to use it. The Soviet Union was a paper tiger, military and economically. Indeed, I recently read a paper that found no economic advancement in the USSR from the time of its formation to its collapse.
One can have all the resources in the world, but without the proper institutions to shape incentives, you might as well be in a barren wasteland.
I do not fear China. I do fear foolish policies that make America less safe and less wealthy, like economic nationalism. We should conserve the things that made America great, not toss them out and adopt the (failing) ways of enemies.
Thomas L Hutcheson
Apr 28 2024 at 6:39am
I agree about fear, but healthy concern should spur policies that are good anyway:
Closer integration with non-Chinese Asian economies (TPP +)
Large increase in merit based immigration including from China
Reduce the deficit to an amount equal to the outlays for high-return public investments (like air traffic control)
Land use and building code reform to permit more efficient use of especially urban land.
for a start
Anonymous
May 1 2024 at 9:59am
Others who do not believe this (most people) understandably feel pretty differently.
Scott Sumner
Apr 26 2024 at 10:21am
We aided the USSR during WWII in order to defeat Germany.
Robert Benkeser
Apr 26 2024 at 7:58pm
Yes, and that same military equipment was used to subjugate all of Eastern Europe. This is part of the reason we have a moral obligation to be funding Ukraine’s military. FDR’s admin was shot through with Soviet spies and sympathizers. We all paid for that in the long run.
Jose Pablo
Apr 26 2024 at 12:09pm
Sometimes free trade does end up hurting us. Desperate American companies built factories in the USSR only to see their IP stolen
Desperate? Why?
There are risks in everything a company does. The companies’ executives in charge of managing those risks are the best placed to do so.
It seems arrogant to even think that these professionals (well regarded, very well-paid, and with ample experience on the field) need your “protection” to handle those risks that you mostly know about by reading the press.
vince
Apr 26 2024 at 4:56pm
Who cares??
Jose Pablo
Apr 26 2024 at 6:54pm
So, it is about not doing things that can build up the USSR military defense industrial base. I thought Robert was trying to help “desperate” American companies.
The narrative now changed, it is more about “limiting the ability of American companies to manage their own affairs, and so, very likely, causing economic damage to, allegedly, limiting the build-up of the USSR military defense industrial base”. Now that we are not using the very poor excuse of “protecting” American companies:
* Very likely, the biggest help to the build-up of the USSR’s military defense capabilities was the development of the Manhattan Project. That was a project sponsored by the American government. Corollary: don’t develop high-tech military projects because they are going to end up, sooner or later, in the hands of other armies
* Even with this valuable help from the US the Russian military capabilities don’t seem very impressive. They are unable to defeat the 22nd army of the world (at the time of the invasion). Same for the US, by the way. Its army was unable to defeat the Vietnamese or the Afghans.
* The main reason for the “building up of military capabilities” is the existence of a foreign threat (real or perceived). If the objective is stopping other countries from building up those capabilities the best policy, and the cheaper, is to stop looking like a threat and looking more like a commercial partner.
The problem is that “nationalists” love looking like a threat to others (you can even argue this is what they love the most). They just don’t like others looking like a threat to them. This lack of empathy can be, mostly, found in children, nationalists, and similar undeveloped personalities.
vince
Apr 26 2024 at 9:15pm
Why even have a military? Kumbaya.
Jose Pablo
Apr 26 2024 at 9:30pm
Yeah, right? I frequently wonder the same, Vince! Why expend all these resources on that nonsense instead of poetry, music, cures for cancer …
The best answer I normally get is that we should have a military because other countries have a military. Which makes me wonder: is it possible that other countries have a military just because we have a military?
In that case, we are not only wasting our resources, we are forcing others to waste theirs: more music, more poetry, more cures for cancer … all wasted.
vince
Apr 26 2024 at 10:41pm
Actually, Jose, I agree with you. But it’s a game theory problem.
Jose Pablo
Apr 26 2024 at 11:03pm
Yes, Vince, it is. At this point, and by far, the most dangerous game we humans have ever played.
Robert Benkeser
Apr 26 2024 at 8:01pm
Desperate because the US was enduring the Great Depression.
I generally agree that business managers are in the best position to assess risks. However, if said technology has national security implications, then the “free trade” could end up causing negative externalities for the rest of us.
Jose Pablo
Apr 26 2024 at 9:25pm
Ah!, it is about negative externalities.
Then, nothing to say. Obviously, banning trade has no “negative externalities” whatsoever.
Everything has national security implications. Can I keep flying my drone?
David Henderson
Apr 26 2024 at 10:22am
Thanks for writing this, Scott.
Laurentian
Apr 26 2024 at 4:42pm
The first cosmopolitan was Diogenes who lived in a tub in the street. Wonder what the health benefits of that were And he had few possessions and wanted to live more naturally.
Lizard Man
Apr 26 2024 at 5:09pm
The US does not control what China does. China’s leadership has been insisting on conquering Taiwan for decades, and for various reasons most of the US’ treaty allies in Asia are likely to want the US to fight to keep Taiwan independent (or share nuclear warheads if the US decides not to fight). Decoupling is really about trying to manage risk, when China basically holds all of the cards. They manufacture everything, and the US and its allies don’t as of now. It is merely responsible to take steps to make sure that your geopolitical rivals don’t have the power to catastrophically damage your country by unilaterally cutting off trade.
Scott Sumner
Apr 26 2024 at 7:00pm
Most the the Western world tried to “catastrophically damage” the Russian economy in 2022, and today Russia is booming. Good luck with that.
Any attempt by China to hurt the West would end up hurting China far more. That’s the least of my concerns.
Robert Benkeser
Apr 26 2024 at 8:05pm
Despite breathless reporting, Russian sanctions have been highly highly circumscribed. And we haven’t pulled out our big gun: secondary sanctions. If the US applies secondary sanctions on a bank, the bank generally implodes.
http://jpkoning.blogspot.com/2024/02/the-first-round-of-us-secondary.html?m=1
If the Biden applied the threatened sanctions on Chinese banks for aiding Russia’s genocidal war, then the Chinese banking system would collapse overnight.
Jose Pablo
Apr 26 2024 at 7:10pm
to catastrophically damage your country by unilaterally cutting off trade.
So, to avoid China catastrophically damaging your country by unilaterally cutting off trade you made that trade illegal. And this is going to be harmless to your country?
You see that what you say makes no sense, right?
It is a kind to say that in order to avoid my neighbor unilaterally cutting off my hand while I am sleeping I will cut off my hand myself.
Lizard Man
Apr 27 2024 at 12:17am
The US has been pushing for decoupling haphazardly, not using bans for the most part. Much or even most of what needs to happen is to get Western CEOs to pull their heads out of the sand and recognize the risks that already existed with sourcing production in China. The CEOs don’t get the intelligence briefings that politicians do, and really no one does except high ranking military and intelligence officials, so we are all somewhat ignorant of the relative military capabilities and intentions and plans of China. Members of the public also don’t have good information about the relative strength and power of the US military and the militaries or Taiwan, Japan, South Korea, the Philippines, etc. It is unusual for Democrats and Republicans to agree on anything, and yet they seem to mostly agree that China is a rival and a threat. Given the money involved in decoupling, you would expect US CEOs to be campaigning very hard against decoupling if the CEOs believed that would increase profits. I am unaware of the C-suite set doing that.
Jose Pablo
Apr 28 2024 at 10:34pm
China is a rival and a threat
A rival? In which sense?
What kind of threat?
Don’t be so scare, Lizard! Myriads of armed small little yellow men will not be running down the streets of Buffalo (New York) any time soon. Time to outgrow your cartoons.
Jon Murphy
Apr 26 2024 at 7:17pm
The US produced about $2.0 trillion manufacured goods last year. It is less than China, but it is a far cry from “nothing.”
China also produces about 28% of global manufactured goods (US is about 17%). Again, that’s a lot, but it is not “everything.”
Don’t let hyperbole drive your thinking. Hyperbole leads to unclear thinking, over reactions, and bad policy
vince
Apr 26 2024 at 10:44pm
True, but irrelevant.
Jon Murphy
Apr 27 2024 at 7:41am
It’s directly relevant to his post. It shows his claim is incorrect. Facts are, indeed, relevant.
Jose Pablo
Apr 26 2024 at 7:25pm
The US does not control what China does
Why should?
Texas doesn’t control what California does (and “Texas” frequently gets huffy about what California does). Does it mean that Texas should ban commerce with California?
China’s leadership has been insisting on conquering Taiwan for decades,
Yeah!, isn’t that amazing?!! A country of 1,400 million people and 3.7 million square miles so fixated with a tiny island of 0.014 million square miles (0.4%) and 23.5 million people (1.7%). The expending of a significant amount of resources in such an absurd fixation should serve us as a cautionary tale against nationalism (look what it can do to the human brain!!). Not like an excuse to dig into our own nationalism.
Robert Benkeser
Apr 26 2024 at 8:13pm
“Public meetings between officials from Russia, Belarus, the People’s Republic of China (PRC), Iran, and North Korea have surged in recent days, with at least 10 high-level bilateral meetings between April 22 and 26, underscoring the deepening multilateral partnership these states are constructing to confront the West.”
This does not look like an amorphous or ambiguous grouping of countries to me. I’m all for free trade with nearly the entire world. But I agree at the very least with ending trade with these countries in any goods deemed relevant to national security.
Jose Pablo
Apr 26 2024 at 9:45pm
Maybe they are meeting to decide on ending free trade with all NATO countries. Maybe they have become suspicious that NATO countries are deepening this multilateral partnership constructed to confront the East. After all, NATO countries don’t look like an amorphous or ambiguous grouping of countries to me.
Wouldn’t it be funny that Russia, Belarus, the People’s Republic of China (PRC), Iran*, and North Korea, were deciding to punish the West by doing what you are proposing to do to punish them (ending trade)?
I am confused, who would be punishing who?
* Iran The case would be particularly funny. After all the CIA and the British did to keep the Iranian oil under the control of the West (including the overthrow of a democratic government) to end up banning the trade of this oil! … oh! wait …
** On a technical note: “Countries” don’t trade. Individuals do.
Robert Benkeser
Apr 26 2024 at 11:59pm
NATO is a defensive alliance. Countries join NATO by choice. Countries join the authoritarian side (Russia, China, North Korea, Iran) by force.
Jose Pablo
Apr 28 2024 at 3:26pm
So, North Korea is forcing Russia to joint this Alliance of Evil?
Or is it the other way around?
Jon Murphy
Apr 26 2024 at 9:46pm
We already forebid trade with every country on that list except China (Russia and Belorus very limited trade). How’s that pressure been working out for ya?
Robert Benkeser
Apr 26 2024 at 11:57pm
Iran has received far harsher sanctions from us than Russia. And it shows:
http://jpkoning.blogspot.com/2024/02/the-first-round-of-us-secondary.html?m=1
Media has no clue how sanctions work. If we applied secondary sanctions to a country, it would blow up their banking system.
Scott Sumner
Apr 27 2024 at 1:54am
If it takes secondary sanctions, then why worry about China? Do you think that China will get Europe to stop trading with us?
Jim Glass
Apr 27 2024 at 7:45pm
No. But China may be well on the way to getting Europe to stop trading with *it*…
More information about the security and trade issues involved, and “punitive tariffs” coming.
Robert Benkeser
Apr 28 2024 at 7:47am
Whether Europe wants to admit it or not, they’re already in a proxy war with China. The sooner Europe realizes this, the better for all of us.
Jim Glass
Apr 29 2024 at 2:09am
[Jon Murphy wrote:]
What? They sure knew how to use that first atom bomb they stole from us. That was a nice bit of IP. Beria ordered them to use the American design instead of their own because, quoting Beria: “We know it works”.
Do you really think they were stupid? They sent back pictures from the surface of Venus. “No clue” how to use IP???
A “paper tiger” with 40,000+ nuclear weapons and a military occupying ~20 nations westward through a third of Germany. Plus, driving and timing the Berlin Crisis, Korean war, etc. … would you like a list? BTW, how did that paper tiger acquire a third of Germany?
Don’t let hyperbole drive your thinking. Hyperbole leads to unclear thinking, over reactions, and bad policy.
I’ve read papers saying the USSR had total negative GDP. I spent some time over there seeing with my own eyes, and I believe that is entirely plausible.
I *also* saw Soviet tanks roll over Czech citizens who were celebrating the arrival of ‘socialism with a human face’ literally one day before. Those tanks were not made of paper. “Reform is counter-revolution”, explained Brezhnev, following the institutional incentives of Leninist regimes.
Regimes can gain tremendous power through zero-sum and negative-sum strategies. Indeed, that’s been the traditional way to do it through all history. You seem to imagine that regimes with zero-sum economies must be clueless, phony, paper tigers. Um … no. Those nukes, tanks, and occupation armies were entirely real. And zero-sum strategies drive aggression.
“Barren wasteland”. Again with the hyperbole. Regimes everywhere lack “proper institutions to shape incentives”, how many are barren wastelands? Putin’s Russia for sure lacks the institutions, is it a barren wasteland? A paper tiger?
As per actual history, regimes with bad institutions often have the ability to develop plenty enough economic and military power to create barren wastelands all around them, as driven by their own perverse incentives, before bringing the waste upon themselves. Obvious examples: the Kaiser’s Germany, Adolf’s, the USSR, Russia today … many, many more on all scales.
Ah, but for truly bizarrely bad institutions and incentives, see Imperial Japan. Invades China in 1931, by 1941 is well on the way to murdering maybe 14 million civilians, mostly Chinese but millions of others too, to gain resources. Zero-to-negative sum strategy for sure — but it paid well to the regime. (Somehow Tojo always gets left out of the “who killed more, Adolf or Uncle Joe?” contests when he might be the champ.) In 1941 they are thinking of attacking the USA. (No, they were *not* forced by the US oil embargo.) Institutions & incentive driven all the way. Now consider this factoid...
While considering the pros and cons, the War Cabinet received economic analysis saying that in a war the USA could outproduce them in war materials 72 times over. Not a typo, 72-fold. (The Army objected: “Nah, only 24 times”.) In the Pacific, Japan and the USA were equal peer powers. Due to the China war, Japan’s economy was running flat out, rationing already across the civilian population, minimal increase possible. The USA was still isolationist indolent, with USA GDP near 5x Japan’s. When the USA goes to war economy, the marginal increase in war production becomes: USA 5x total Japanese potential versus Japan nothing. EVERYONE knew the USA would destroy them in a war. Their Foreign Minister, Yōsuke Matsuoka, grew up in California, went to the University of Oregon Law School and planned to retire in the USA. He knew. Tojo knew. They all knew. And they attacked us. Now *there’s* a story of sub-par institutions and incentives in action!
Japan 1941, Countdown to Infamy, by Eri Hotta, details Japan’s decision making during 1941. Read it and you may never think of “institutions and incentives” in the same way ever again. You may also realize that the regimes with the poor institutions, and dubious economics relying on zero sum strategies, may not be weak paper tigers to safely dismiss — they can be wickedly dangerous.
Jim Glass
Apr 29 2024 at 3:31am
China’s got 1/6th of the USA’s per capita GDP and all of one military ally, North Korea. What’s to fear?
But wait … Japan 1941 relative to the USA had only 1/4 the GDP of China today, knew it was already overstretched and that the USA would crush it in a war. Yet it attacked us and caused us 350,000+ casualties in a four-year war.
Yikes! What happened? Could it happen with China today? Hmmm… “Institutions and Incentives”…
The CCP is telling all it will re-join with Taiwan soon by force if necessary (reputedly ordering the PLA to be ready by 2027), and Taiwan ain’t agreeing any other way.
Taiwan is *hugely* more important to the world economy than Ukraine. TSMC’s sales alone exceed all Ukraine’s pre-war exports, and its chips are hugely more important to the world economy than Ukraine’s wheat, irreplaceable like 1970s oil to economies and national security. And Taiwan is at least as important to the international “rules based order” — all the nations of the First Island Chain and South China Sea aren’t going to be any more accepting of a predatory China than the Baltics, Poland and Europe today are about Russia. So if China attacks Taiwan, one of two things happens…
(1) War. The biggest since WWII — 24 war gamed scenarios overall show China attacking Japan (home of the biggest, nearest US bases) bringing in everybody down to Australia. With nuclear risk *much higher* than in Ukraine. “Use Nukes” is the save-the-regime strategy. Putin’s regime is safe, Ukraine will never march to Moscow. But if an invasion of Taiwan goes poorly — in most scenarios it does — Xi’s regime may face real problems. BOOM.
(2) Not War. Then there is the biggest military, trade, sanctions face-off since the start of the Cold War, lasting how many years? Vietnam just made a strategic partnership with the US. (China invaded them in 1979.) Japan is doubling its military budget. South Korea and Japan *hate* each other yet just signed a military cooperation deal. Australia is getting nuclear subs. India’s soldiers are fighting Chinese on the border with clubs and bats, and it is up-arming fast. “Not War” = Cold War II.
How does “free trade” fare with these options? Concerned about anything yet?
China knows this, of course, so why the heck would it even think of attacking? Because Leninist regimes are institutionally win-lose predatory expansionist, see their history back to the Russian Civil War. And Xi is taking the CCP back to its Leninist roots, *hard*. How hard? He’s condemning the Soviet Communists for being “too weak” (!). And get this: Now, in 2024, Xi is denouncing Khrushchev for betraying Stalin back in 1956! *That* hard. What was Stalin’s foreign policy record?
Plus, Xi is fueling popular revanchism, nationalist grievance and anger over past injustices, that always works out well (1930s Germany, Putin’s Russia). Leninist institutions and incentives in full play, with Chinese characteristics.
Happily, the West has proven-by-test knowledge of how to contain such regimes to prevent the worst military conflicts — keeping rules based order and liberal democracies safe. People under age 50 may not remember, but: Deterrence via being very strong and building alliances (see above); Continuous engagement and negotiating with no hostile paranoia; Comprehensive trade control regime. Here’s 16-page academic survey of the origins: US Compound Containment of the Soviet Union, 1947–1950
The trade regime, COCOM (Committee for Multilateral Export Control) ran for the Soviet Leninists 1947-1991. You can read the details above, but it was basically applied common sense.
One doesn’t trade weapons technology to those who will use it kill one. When Nikita is banging his shoe at the UN saying “We will bury you!”, you don’t free trade him tech to help him build better ICBMs faster. Or anything that would remotely contribute in that direction. I’m sure you agree.
At the other end, people are welcome. The more visitors, cultural exchanges and students going back and forth, the better. (That’s how I got over to the workers’ paradise my first time.)
In the middle, it varied. Secure key resources needed for security. Don’t supply same to other side. Restrict trade in assets most vital to other side’s economic long-term growth. Slow their acquisition of highest technology. Easier terms in some areas, changing with the times. Google “COCOM” for the full history of what went down.
Did firms cheat to beat controls? Sure. Did it collapse Communism? Nah. But it maximized national safety, and knocking 0.5 to 1 point off the other side’s GDP growth annually for 40 years compounded adds up …. it helped things end well.
Just remember the tradeoffs. Safety is not a free lunch.
Sergei Guriev, Russian former presidential advisor (“compelled to emigrate quickly”) says Putin took the German energy deals as a sign that the West was weak and wouldn’t fight — signaling matters between regimes, and that’s not a signal to send to a revanchist aggressive authoritarian regime … Japan’s war leaders soothed themselves with “Americans only care about baseball and making money, they won’t fight”, *not* a good message for us to have sent them … in 1938, German Generals had a coup set up to topple Hitler because they deemed war with Britain suicidal — then to preserve trade with Germany the British government actually punished private business that sought to stop trading in Germany for moral reasons. What signal did that send?
Guriev’s experience with Putin converted him from a life-long “free trader” to a “friend trader”, saying: the marginal cost of war is so vastly larger than the marginal gains from trade, when the latter may at all increase the risk of the former, act accordingly. That’s economics too.
Yes.
We may be getting back to the third one now. Lest we forget or oversimplify how we did it before, that quote is from the best concise summary I’ve ever seen of the many factors that went into “winning the Cold War”, via the US Naval War College.
Thomas L Hutcheson
May 1 2024 at 7:12am
Restricting trade for any reason* (even if successful in achieving the, let’s even suppose, valid objective) will still have a cost across other objectives.
*The “optimal” tariff/export tax may be an exception, I’m not sure.