Pressure trade not free trade

I’ve recently used the example of GE and its avionics joint venture with China’s state owned AVIC to illustrate the contradiction between the free trade principles U.S. executives like GE CEO Jeff Immelt espouse and the anti-free trade practices they are forced to adopt in response to the strategic economic development plans of major countries like China.

But as an equal opportunity critic, let me say that GE is not alone in being caught in the free trade versus mercantilism trap. The Wall Street Journal reported this week that Boeing is going to extend by ten years its contract for supply of 737 horizontal stabilizers from China’s Shanghai Aircraft Manufacturing Company. According to the Journal, this was part of Boeing’s "charm offensive" in one of the most important aircraft markets in the world. In other words, Boeing is not necessarily having its stabilizers made in China because that’s the best place to make them in terms of market forces considerations like cost, quality, and productivity. Rather it’s having them made there because it understands from its reading of Chinese industrial policies and from its discussions with Chinese authorities that not to do so would be to endanger its chances of selling its airplanes to Chinese airlines.

Of course, in time, Shanghai Aircraft may become or may already have become a competitive producer as a result of learning from Boeing and gaining economies of scale from supplying Boeing. In view of the indigenous development policies of China, it is perhaps understandable that Boeing feels it must make concessions and put on "charm offensives" to assure its long term market access.  But this is not how free trade and globalization are supposed to work and it is not the basis of the rules of the World Trade Organization, International Monetary Fund, and World Bank, the guiding global institutions.

Another example of the great gap between the free trade rules and the realities of globalization is the letter to Senate leaders submitted on Wednesday by the American Chamber of Commerce in Shanghai and 51 associated organizations. It called on Senate leaders Harry Reid and Mitch McConnell to refrain from bringing legislation forward that would direct the president to declare China a currency manipulator and to begin some process to alleviate the negative impact of the manipulation. It didn’t deny that manipulation is taking place. How could it? The IMF, the G-20, and virtually every economist in the world know and have admitted that China’s currency policies are having a negative impact on many other countries including such as Brazil, Mexico, India, and other developing as well as developed countries. But the letter said that pressure to change should be brought on China by APEC, the G-20, and other multi-national bodies rather than by the United States government.

This may even be wise diplomatic counsel (although the G-20 and APEC and the IMF have already tried and proven that China will not listen to them) in terms of mitigating Chinese hostility toward the United States. But the Chamber is not advising inaction for this reason. Rather it fears and says it fears retaliation against its member companies by Chinese authorities in the event of some U.S. policy action on currency valuations.

What this demonstrates is that global corporations are frightened of and therefore more responsive to the wishes of authoritarian regimes operating with a high degree of discretionary administrative and regulatory authority and a low degree of rule of law than they are of and to democratic regimes in which the corporations can be sure the rule of law will protect them from arbitrary actions against them by the authorities.

The Chamber knows the U.S senate and the Obama administration aren’t going to do anything nasty to its members even if they urge no action on currency policies that everyone knows are distorting the global economy and undermining its stability. It also knows that to call for or even to acquiesce in some counter policies, be they no more than calling for consultations in the IMF, may well result in damaging retaliation against its members.

In the same way, producers like GE and Boeing know that the name of the game is not free trade, but strategic trade. They know that they are likely to lose business and to be treated in a discriminatory fashion if they don’t transfer some production and technology to China. Nor is this limited to China. Indeed, the European Airbus became Boeing’s major competitor as a result of policies very similar to those now being pursued by China. The truth is that what we have long been told is free trade has in fact been trade as shaped by government pressure on corporations whose home governments do not respond in reciprocal fashion.