The media has been beating us over the head with news of President Trump raising the tariffs on multiple imports from China, which stirred a retaliation of $60 billion worth of tariffs towards the United States and caused financial markets to fall. I’m not going to debunk these moves towards trade war or explain why tariffs are just another tax on citizens as many have already covered this extensively, including Think Liberty’s own Andrew Kern on the Foundation for Economic Education. What will be covered is an explanation of China’s economy and why it has become a worldwide economic target because if most of my audience is like me, they have little idea why there’s such a focus on the country in worldwide news.
China had a centrally planned economy from 1949-1978 owning 67.5% of all industry and containing a private-public partnership with another 32.5% by 1956, and redistributed 45% of the farmland to workers will little or no land. The government also encouraged farm families to create communes with other landowners which nearly everyone did by 1958. All of this led to a great amount of inefficiency which the government tried to solve with their “Great Leap Forward” which instructed the communes to take over managing and move families into dormitories to improve efficiency, but what resulted was an economic crisis where agricultural output and value severely declined causing famine.
In response to this crisis, the Chinese government decided to decentralize the government even more, cut agriculture taxes and return privately owned land to the families who originally had possession, but this was soon dashed as Communist Party Chairman Mao Zedong, the mastermind behind the Great Leap Forward felt that the party leadership was moving too far away from communist principles and launched a Great Proletarian Revolution. Mao shut down the nation’s schools and ordered the youth of the nation to call out party leadership for “embracing bourgeois values” which led to attacks on the intellectuals of the nation and many leaders were beaten and imprisoned. The cultural revolution ended in 1972 upon Mao’s death, but its effects would be felt in China for years.
This history is a part of the overall fear of Chinese economic growth as the anti-communist red scare of the US during this period still lingers. The country received assistance from the Soviet Union during the first years of the newly declared People’s Republic of China when the US was enacting several interventions worldwide to stop the spread of communist policies. In 1978, however, the Communist Party decided to enact new reforms allowing farmers to sell their product on the market, and a year later they allowed foreign capital to enter the country along with lifted the prohibitions on companies keeping their profits and setting up individual wage structures.
Reforms continued into the early 2000s despite the attempts of conservative leaders to maintain state power. China would private most state-owned enterprises, maintaining control of banking and petroleum, and reduce tariffs and regulations. After 2005, many of these reforms were halted or rolled back by new leadership and China’s current president Xi Jinping has been increasing state control of enterprise since his rise in 2012.
China is now the world’s largest economy, producing over $4 trillion more than the European Union and the United States in 2017 and was the EU’s second-largest trade partner in 2018 creating a nearly €200 billion surplus. China is also an extremely important trading partner for many European countries. However, with a surge in wealth has also come a surge in criticism.
Due to their frequent blocking of allowing foreign companies to set up shop in their borders so the country can focus on exports, the country has been accused of being unfair in trade relations and being mercantilist (propping its own economy with subsidies, tariffs and trade barriers) while claiming to support free trade. Donald Trump has also accused the country of purposefully making the yuan artificially low to make Chinese goods less expensive than American goods, which definitely happened in 2014, but since is no longer the case.
All of these accusations focus on how individual countries have been slanted, and not the more important issue of China generating the massive wealth of the country through state interventions which have impoverished its population.
China’s policy of focusing on exports has harbored accusations by EU officials of making it harder to address the human rights issues because of the number of politicians with financial assets involving them. European Commission president Jean-Claude Juncker claimed last April “One country isn’t able to condemn Chinese human rights policy because Chinese investors are involved in one of their ports. It can’t work like this.”
In 2008, the country passed the Labor Contract Law, which enacted a 40-hour work week, requirements for overtime pay, and limiting the amount of overtime that could be worked to 3 hours a day. One provision, however, was that any employee is entitled to severance pay upon being fired equating to a month of wages per year worked. Employers responded to these laws by switching employees to agency workers to reduce their wages and the benefits that they had to be paid. Other companies have taken measures to prevent employees from getting a second job or employed student interns who were told they would not graduate without it.
Despite all of this, China’s workers make either equal or higher wages than parts of the EU according to Forbes, and low unemployment, but imagine the increase in earnings should the country completely open to trade. The largest labor pool in the world is within their borders and contributed highly to their increase in wealth, so the demand is there, but companies aren’t allowed to enter and take advantage of it.
Beyond the economic realm, the Chinese government also heavily censors internet usage and has control over the schools and media which tout the supremacy of the Communist Party. The government also only allows five approved religions and regulates their finances, personnel, and publications.
China assuredly deserves the amount of attention it gets because it contradicts the traditional narrative of authoritarian government leading to the destruction of the economy. Theoretically, they should not be as large of a powerhouse, but they are demonstrating that governments can open up their markets while oppressing their citizens.
Does this mean that the sanctions and tariffs being placed or being considered worldwide are the appropriate response? No, because it won’t do anything to change the countries policies since so many economies are dependent on their products. World governments are going to have to find a solution to end China’s economic manipulations without punishing citizens or its businesses.