“Everyone’s afraid of China”

It was one of those passing remarks, usually quickly lost in the flow of conversation, that caught my attention last night at one of those establishment think tank dinner parties of which there are dozens in Washington every night.

This was the type of gathering where 20-30 big thinkers, former officials, media pooh-bahs, and the odd business executive or two gather with a current high-ranking official to find out what’s really going on and/or to tell him/her what he/she should really be doing about the state of the world. The governing protocol is always Chatham House rule which stipulate that the discussion is off the record and no one can be quoted by name outside the room.

While this is meant to encourage frank and open discussion, I am always impressed by the extent to which people are careful about what they say at these dinners. No one trusts the rules enough to venture too far off the orthodox reservation of whatever the topic of the night happens to be. That’s why I was very surprised at last night’s discussion of globalization and how to make it work for the United States when one eminent participant commented that it is becoming virtually impossible to consider further rounds of global free trade negotiations because "everyone is afraid of China." This, of course, meant that many, if not most, countries fear that further opening their markets to Chinese producers and investors may put them at an economic disadvantage.

Now please understand. This was not an AFL-CIO or textile industry dinner. This was a group of people who had mostly championed China’s entry into the WTO and the granting of permanent Most Favored Nation treatment to China by the United States. The premise of those decisions was that bringing China fully into the world global trading system and the process of globalization would foster adoption of western free market ideas and policies and eventually even adoption of western democratic politics by China. In other words, the notion was that globalization would tame China and make it a nice global partner like, say, Singapore  — maybe a little authoritarian but firmly committed to free market, free trade, capitalist ideals.

But now some important people in this group were saying it wasn’t working. That had already been somewhat indicated by the global trade figures and the chronic and enormous surpluses that China has long been accumulating in contradiction of forecasts to the contrary by many in the room. But until last night I had not heard such direct admissions of concern. Indeed, another key thinker emphasized deep fear of China’s vacuuming up of intellectual property around the world without regard to patent and copyright protections.  Several people agreed that the China phenomenon is seen as a threat by countries around the world.

The conclusion was that for the foreseeable future new trade deals will have to be bi-lateral, regional, or sectoral in scope rather than global and comprehensive. At one level, that seems logical and correct. But it is actually a frightening admission of a much larger and more dangerous failure. It means that rather than having one trade regime covering all countries and administered by one WTO, globalization is leading to a proliferation of Preferential Trade agreements (we call them Free Trade Agreements (FTAs) but they are really PTAs) administered by a congeries of different bodies and governments.

But that is exactly what we had prior to the Great Depression and World War II. The whole point of the post war creation of the General Agreement on Tariffs and Trade and eventually of the WTO was to obviate and avoid this discriminatory system of preferential and special bi-lateral or multi-lateral deals that contributed so much to the breakdown of the global economy and the outbreak of war in the 1930s.

Does the passing, little noticed comment about everyone being too afraid of China to negotiate free trade suggest a return to the future? This is one of the great questions being posed to global leaders. We shall return to it.