Failing to learn from history

Yesterday’s Wall Street Journal story, "Obama Panel to Watch Beijing," took me back nearly thirty years.

According to the story, Deputy National Security Adviser Mike Froman is overseeing formation of a task force that will aim to enforce U.S. and international trade rules. Aimed primarily at China, the task force apparently will consist of officials from the departments of Commerce, Treasury, and Energy as well as from the Office of the U.S. Trade Representative. In particular, it will focus on trying to stop or alter China’s currency manipulation, intellectual property infringement, and policies that condition market access on technology transfer or on moving production to China.

The story especially grabbed my attention because in the mid- 1980s as Counselor to the Secretary of Commerce in the Reagan administration I was designated the Chairman of a Trade Strike Force whose purpose was to seek out unfair trade wherever it might be and smite it down by enforcing U.S. trade laws. I immediately felt a kindred spirit with Mike Froman and didn’t know whether to congratulate him or to offer condolences.

If nothing else the Enforcement Task Force proves the truth of the adage that the more things change the more they stay the same thing. In the early and mid-1980s the United States was in recession with unemployment in the 8-10 percent range with budget deficits and trade deficits burgeoning. The Japanese were eating Detroit (autos) and Silicon Valley (semiconductors/electronics) for breakfast and then gorging on Pittsburgh (steel) and Cincinnati (machine tools) for lunch and dinner while the French and Germans were nibbling at Seattle (Boeing). The political scene was ugly and the cry of "unfair trade" was loud in the land as members of congress actually gathered on the steps of the Capitol to smash Japanese video recorders. So I was told by the White House and the Secretary of Commerce to find the perpetrators of this unfair trade and show them no mercy.

The European Airbus made a beautiful target. That it was being heavily subsidized and sold below cost was clear. It was also clear that a number of European airlines, most of them wholly or partially state owned, were being compelled by their governments to buy the Airbus. Much of this was in obvious violation of international and domestic U.S. trade laws and agreements. It seemed an open and shut case. All I and my inter-agency Strike Force had to do was pull together the facts, show them to the big guns in the White House, and carry out their orders to impose penalties on the Airbus.

Much easier said than done. The top priority of the United States then was not international trade and competitiveness. Rather it was national security, the Cold War, and destroying the Soviet Empire. NATO was a high priority instrument of that policy. So when the Strike Force presented its recommendations to strike at the Airbus, then Secretary of State George Shultz pounded the table and said: "Absolutely not. To do so would shatter NATO." And that was pretty much that for the Strike Force. Oh sure, we found some Japanese dumping and initiated a few anti-dumping investigations, but it had little impact. As with the current Strategic Dialogue with China, we had several dialogues with Japan. Then as now, these dialogues were ostensibly aimed at enforcing trade laws and agreements, but in fact they were really an attempt to remake Japan in our own image. They had little success.

Of course, it’s impossible to say whether the new Enforcement Task Force will fare better, but the Shultz example demonstrates one of two major problems with these kinds of efforts. The State Department or Defense Department or some other agency will assert a higher priority issue to impede the work of the task force. The potential for this with Beijing is already evident. Treasury Secretary Tim Geithner is in Beijing as I write apparently explaining the administration’s plans. This is fascinating because it raises the question of whether the task force is a serious exercise or just a maneuver for domestic political purposes as the Reagan Strike Force was.

The task force is ostensibly aiming to deal with China’s currency manipulation. But Geithner has steadfastly prevented Treasury from naming China a currency manipulator for the past three years. In his whole career, Geithner has never supported taking action on trade cases. So is he in China to tell the Chinese that the Obama administration is really going to get tough or is he there to tell the Chinese not to worry because this is all just election year politics in America? Only time will tell and it may be that the White House is enough afraid of the elections that it will actually take action. However, don’t bet your ranch on that.

But even if this is a serious effort, the chances are that it will fail because of the second problem which is that the "enforce the rules" approach is just not based on a realistic appraisal of the situation.

The premise of all these discussions since 1950, first with the Japanese, then with the Asian Tigers, and now with the Chinese is that we are all playing the same game of laissez faire, free market capitalism, and free trade. Since we and the Chinese, Japanese, Koreans, Germans, and others are all members of the World Trade Organization (WTO), the International Monetary Fund, and so forth, it is assumed that we are all playing by the same rules and that if there are problems it must be because someone is cheating and being unfair. So that country must be taken to task and punished if need be to make it be a good boy or girl and play by the rules. Indeed, at the APEC meetings in Honolulu in November, President Obama explicitly said that "everyone has to play by the rules."

Well, the truth is that we are not all playing the same game and the rules are not well enough defined and established to compel  everyone to play the same game nor are they really enforceable. China, like most of the rest of Asia and much of Europe and parts of Latin America is not playing the Adam Smith/David Ricardo American game. Rather it is playing the mercantilist game pioneered by Japan and, to a lesser extent, Germany. The problem is not a matter of discrete issues in certain areas. Rather it is a clash of economic systems. Sure, one can file cases concerning individual products or problems and maybe even get a settlement, but while that’s going on, a hundred similar situations will arise elsewhere because there is a deep underlying systemic difference that keeps giving rise to successive seemingly discrete issues.

Moreover, the friction over continuous charges of unfairness and cheating  becomes poisonous and generates reactions. Each time the United States accuses China or any other country of violating the rules, it is challenging the country’s honor and striking at its veracity and giving that country, especially if it is China, excuses to strike back in various subtle, bureaucratic ways that are often difficult to detect until they have done their damage.

So while it is somewhat encouraging that the Obama White House has at last noticed that there is a problem in our economic relations with China, it is devoutly to be hoped that it will quickly come to understand that it doesn’t need an Enforcement Task Force so much as it needs an entirely different game. It’s like the U.S. is playing baseball and China is playing football. China is playing football fair and square, but America thinks the game is baseball. So the U.S. players aren’t wearing pads and helmets and they’re getting beaten up. Instead of telling the Chinese to play baseball, maybe we Americans should put on some pads and get a different kind of ball.