Editor’s note: This is an excellent article with a short economic history of how strategic trade, in the form of tariff intervention, is a fundamental part of how successful nations grow from poor to rich. From Great Britain to the United States to China.
[Spencer P. Morrison| December 11th, 2018 | American Greatness]
China’s economy is now the largest on earth. Its industrial output is triple that of the United States. Its population, quadruple. To make matters worse, Chinese computing power is on par with ours and their scientific output is gaining fast.
This is no accident. Like Britain, China transitioned from an agrarian to an industrial economy by embracing mercantilism and piggybacking on America’s market.
America is becoming China’s economic colony. China’s slave. But it doesn’t have to be this way. As Britain did, China chose her fate. Now is the time for Americans to choose: do they want liberal free trade and “cheap” Chinese junk, or do they want conservative tariffs? Put another way, do they want an economic future?
President Donald Trump and Chinese President Xi Jinping agreed last week to a 90-day ceasefire in our ongoing trade war.
Trump will postpone the raising of tariff rates on some $200 billion worth of Chinese goods, which was scheduled to occur on January 1. In exchange, China agreed to buy “a very substantial amount of agricultural, energy, industrial, and other products from the United States to reduce the trade imbalance” according to a statement from Sarah Sanders.
China also agreed to aid Trump in denuclearizing the Korean Peninsula and to designate fentanyl as a controlled substance, which will many argue will help America quell its opioid crisis. This is welcome news.
This ceasefire buys both nations time to discuss a number of issues, including the rampant theft of American intellectual property—which costs America some $600 billion in lost profits annually—and China’s variety of non-monetary market barriers.
As of now it looks like President Trump’s tariffs are working as anticipated: tariffs provided the leverage necessary to bring China to the negotiating table. This is unsurprising. The simple fact that China runs a massive trade surplus with America means that China needs us far more than we need China.
Trump knows it. China knows it. And now the world knows it.
In a bolder, more patriotic age the mainstream media would be praising the president for having the fortitude to stay the course. Instead, the consensus view appears to be that Trump should sheepishly apologize to China and wave the white flag: drop all tariffs and let China continue to pillage our nation.
This is not an option.
China is turning America into its mercantile resource colony—just like the British did to the Thirteen Colonies in the decades before the Revolution. I do not say this for provocative rhetorical effect. The only real difference between the two situations is that King George bought our tobacco. China prefers our soybeans.
Snakes and Ladders
In 1776 “no taxation without representation” was not just a political slogan—it was call to arms.
Yet despite the mythology surrounding the American Revolution’s purported casus belli, the phrase was mostly hollow. In fact, the colonists were the most lightly taxed of all Britain’s subjects—those in Britain paid 25 times as much. Further, most of the burden of Britain’s increasingly “intolerable” taxes fell squarely upon the colonial elite. For example, the taxes imposed by the Stamp Act were primarily born by lawyers and other professionals, while the Sugar Act targeted corpulent elites and alcoholics with a taste for rum.
Most American colonists didn’t care about the “intolerable” taxes. They didn’t pay them. Instead, ordinary colonists were mostly concerned with the taxes that Britons imposed upon themselves—tariffs.
In 1721 Britain’s Prime Minister Robert Walpole coalesced the swirling ether that was Parliament’s economic policy into a coherent, nationalistic trade regime: Walpole adopted mercantilism.
Mercantilism is much-maligned and even more misunderstood, so let me clearly define the term: the mercantilist’s ultimate goal is not to hoard gold nor to give political goodies to his friends. Instead, he seeks to increase the size of his nation’s value-added industries by piggybacking on foreign (and colonial) markets. This is done by encouraging economic autarky (self-sufficiency) and export surpluses in value-added production, while limiting imports to raw or exotic materials.
To concentrate value-added industry in Britain, Walpole lowered or eliminated import duties on raw materials, abolished export duties on manufactured goods, boosted tariffs on manufacturing imports, subsidized new industries, and increased quality controls to guarantee that British goods were of high quality. While such government intervention may sound onerous, a policy must be measured according to its practical effects—not its ideological purity.
The only question worth considering is whether mercantilism made Britain rich. The answer is yes—at colonial expense.
Between the decade 1721-1730 and the decade 1761-1770, Britain’s average annual trade surplus with the American colonies grew from £67,000 to £739,000. For context, the dreaded Sugar Act generated a mere £30,000 in annual revenue, while the Stamp Act was projected to generate some £60,000 before it was repealed. Britain made far more money exporting to the colonies than it did taxing them.
Not only did the value of British exports increase, but their composition changed. Between 1700 and 1773, raw materials as a percentage of overall exports declined from 13.2 to 8.8 percent. Likewise, the share of woolen textiles declined from 47.5 to 26.7 percent. These low-margin exports were replaced by manufactured products, the proportion of which rose from 8.4 percent to 27.4 percent. This includes things like glassware, tools, weapons, paper, hats, and nautical instruments—complex, value-added production.
Finally, Britain cut its imports of manufactured goods by half during the period (from 31.7 percent of total imports to 16.9 percent).
Summing up: Britain embraced mercantilism and imposed high tariffs on its value-added industries. This, combined with large export markets in America, clustered an otherwise impossibly large amount of industry in Britain. This boosted wages for Englishmen and multiplied the number of individuals working in “cutting-edge” industries like textile mills. Thus, tariffs—mercantilism—fertilized the soil in which the Industrial Revolution sprouted.
Of course, the opposite of this was true in America. The composition and sheer size of the trade deficit with Britain virtually guaranteed that the 13 colonies would remain economic backwaters, locked into exporting natural resources to Britain in exchange for manufacturing. The colonies were import-dependent—like modern day Guatemala or Kenya. And America would have remained poor like Guatemala if the Founding Fathers had not copied Britain and imposed significant tariffs.
Being Benjamin Button
America is a curious case. Despite fighting a bloody revolution to free herself from her father’s shackles, she willingly—gleefully—now enslaves herself to a harsher master: China.
In the beginning America’s economy benefited from its small, but burgeoning trade relationship with China. They sold us raw materials and low-value output while they bought expensive machinery. We were the mercantile motherland, they were our colony.
For example, according to data compiled by the Observatory of Economic Complexity (which provides fantastic, free data-visualization tools), in 1986 46 percent of our imports from China were garments while 6.2 percent was fabric. Fully 20 percent of our imports were raw materials (seafood, oil, minerals, exotic vegetables).
Meanwhile, 31 percent of our total exports to China was machinery, 13 percent electronics, and 11 percent aircraft. Less than 10 percent of our exports were raw materials (mostly timber).
Of course, the Chinese had no intention of being just another Indonesia or another Brazil. Import dependency was not in their future. Instead, China imposed significant tariffs and non-monetary market barriers on value-added imports, while also encouraging domestic industries with generous subsidies—exactly what Robert Walpole did in 1721.
Guess what? Mercantilism worked. Again.
By 2016, garments constituted just 14 percent of America’s imports from China. Textiles fell to an insignificant 0.49 percent. Raw materials, less than 2 percent. Meanwhile, high-value imports surged: electronics constituted 42 percent of our imports from China, while another 15 percent was machinery.
Conversely, the complexity of our exports to China decreased during this period. Electronics constituted just 11 percent of our exports, machinery 21 percent, and aircraft merely 0.27 percent. Meanwhile, over 25 percent of our exports were raw (or lightly-refined) materials like cereals and vegetable oils, petroleum, and minerals.
America’s economy is simplifying in response to Chinese demand—which will only impoverish us in the long run. The below visualization with worth a thousand words: