JOHN MASON: China & US Trade Wars

Friend of the Peak John Mason takes a closer look at whether the United States is up for the China test

AUTHOR: John M. Mason

News sources are filled these days with discussions about United States tariffs and the possibility that these proposals will lead to trade wars that, in the end will really help no one.

“Many foreign policy experts agree,” writes Eduardo Porter, in the New York Times, “that China is not playing by the rules.” This gives justification for the use of tariffs to punish the offender.

“American businesses,” he continues, “have grown frustrated at its appropriation of their intellectual property.”

“American workers are fed up with China. They believe the Asian giant’s entrance into the world economy cost them their jobs and undercut their wages. Up to a point, they are right.”

And, President Trump is responding. “He has figured out what his voters would like.”

My perspective on this situation is a little different.

China has come a long way over the past twenty years or so. To me, Martin Wolf, in the Financial Times, captures the essence of the American problem: “China’s rise has made the US fear the loss of its primacy.”

“What economists call ‘the China shock’ has been real and significant.”

But, the problem is not what has happened, the fact that China’s economy and place in the world has changed so rapidly and that the United States…and others…need to try and stop what is happening.

The problem, as I see is, is a longer-term issue and one that cannot be overcome by responding to what has happened in the past.

The cause of the problem is the spread of information. All throughout history, information has spread. People and governments can attempt to stop this flow, but about all they have ever been able to do is to slow down the spread.

The whole idea behind this is presented in the very readable book written by César Hidalgo of MIT titled Why Information Grows. The world, Mr. Hidalgo argues, is basically an out-of-equilibrium system that constantly produces searches by humans, and life in general, to find ways to reduce or resolve existing disequilibrium situations. In the process, information grows.

Historically, information grew at a much slower pace than it does now. Given modern technology and the access to modern technology the growth of information has accelerated and will continue to speed up even more and time passes.

Those that have benefitted the most from the spread of information have been those that have accepted, even celebrated, the fact that information spreads and have tried to work with this phenomenon and contributed to its spread.

Here is where the United States has particularly stood out, historically, and it is the foundation of its productivity and strength.

China realized in the 1990s that if it were going to play a role within the world, it was going to have to open up to the degree that it participated in the march forward of the global economy. Yes, China had it own history and its own governmental concerns, but these had to be opened up enough to become competitive within world markets. And, it has done just that.

Russia, to take another example, has stuck with its own system and attempted to control, as well as it could, the flow of information that was allowed within its country. As a consequence, it has remained relatively uncompetitive in world markets.

As information spreads, secrets are unlocked and intellectual property is stolen as the benefits of more and more information are realized and incorporated in the next generation of innovations. People and governments make efforts to control stealing, cheating, and other forms of intellectual property theft, but, the information is too valuable to completely control these practices.

Knowing this to be the case, the best response that anyone in this space can make is to keep executing your plan. You have to continue to grow your intellectual property to make version 2.0…and then 3.0…and then 4.0….and so on.

You can complain about stealing. You can complain about how unfair things are. Yet, that is the way the world works.

Furthermore, the innovations and changes keep coming. The world never stays the same.

And, as Martin Wolf writes in his column, “Experience shows that the complaining will never end.”

The real test, however, comes in how we ultimately react to the situation.

We can try and fight the spread of information. We can try and slow down the changes taking place in society. We can become “Luddites.” We become overly conservative, fighting against any kind of change.

Or, we can become mercantilists, like some world leaders today, and try to isolate our nation and just protect ourselves against all real…or perceived…threats.

And, here we are back to Mr. Wolf’s claim that “China’s rise has made the US fear the loss of its primacy.”

Mr. Wolf concludes his article by stating “We are in a new era of strategic competition. The question is whether this will be managed or lead to a breakdown.”

The answer, I believe, depends upon view the spread of information. If we believe that the normal functioning of the world leads to a greater and greater spread of information then we need to work with this process…not fight it…and work to build an environment in which we build a world community…not build walls to protect individual segments of it from the rest.

I also believe that China wants to be a part of this building process. Many times I have written elsewhere about how China views this process.

But, Chinese leaders tend to be long-term thinkers. Unfortunately, as Mr. Porter writes in his article, Mr. Trump “has figured out what his voters would like.”

That is, Mr. Trump is focused upon the short run…the next election. That is not how you build a global structure that honors and supports the spread of information.

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