The Rise Of China And The Fall Of The ‘Free Trade’ Myth
It has fallen upon Trump, as president of the United States, to respond to this momentous historic shift, and he has done so with his characteristic mix of threats, boasts and volte-faces. But to grasp China’s economic achievement, and its ramifications, it is imperative to ask: Why has a market economy directed by a Communist state become the world’s second-largest? Or, to rephrase the question: Why shouldn’t it have? Why shouldn’t China’s rise have happened the way it did, with state-led economic planning, industrial subsidies and little or no regard for the rules of “free trade”?
The economic success of East Asian countries like Japan in the 20th century had already invalidated the article of faith invoked by Trump in Davos: that nations can advance only by eliminating barriers to the free movement of goods and capital and by minimizing the role of government in the economy. But these historical lessons have long been obscured by economic orthodoxy, one that Trump’s — and China’s — unexpected ascents have now exposed to critical scrutiny.
In his most recent book, “Straight Talk on Trade,” the Harvard professor Dani Rodrik castigates fellow economists for holding fast to a simple-minded view of free trade and globalization, one that he believes has caused economic chaos and political backlash across the West. “Are economists,” he asks, “responsible for Donald Trump’s shocking victory in the U.S. presidential election?” This might be overstating the case. But it is true that the argument that free markets equal progress was most eloquently and influentially advocated by the American economist Milton Friedman.
The paradoxes of China’s rise today are best illuminated by Friedman’s querulous visit to the country in 1980, when China was desperately poor. The Nobel laureate from Chicago was then cementing his reputation as an apostle of free markets. He had just published “Free to Choose,” a book that was written with his wife, Rose, and later turned into a television series featuring, among others, Ronald Reagan, Arnold Schwarzenegger and Donald Rumsfeld. Friedman’s argument, that “the world runs on individuals pursuing their separate interests,” would shape American economic policy for decades to come. He helped disparage the idea, exemplified most vividly by Franklin Roosevelt’s New Deal, that government had a legitimate, and often indispensable, role to play in advancing economic development and protecting the vulnerable. As his keen disciple Reagan famously put it, “Government is not the solution to our problem; government is the problem.”
Friedman’s fervent advocacy of free trade and the efficiency of unregulated markets gave intellectual ballast to the so-called Washington Consensus. Free markets, the thinking went, not only generated wealth for all nations but also maximized consumer choice, reduced prices and optimized the use of scarce resources. Friedman’s faith in the efficiency of markets came to constitute what John Stuart Mill referred to as “the deep slumber of a decided opinion.”
Friedman was the most influential proponent of free trade since Adam Smith declared it, in 1776, the basis of the wealth of nations. But in 1980, few people in China, including the academics who invited Friedman to a lecture tour, knew that their American guest was an impatient, even volatile, ideologue.
A series of (often comical) misunderstandings ensued. Friedman complained about the Chinese man with a “terrible body odor” who received him at the Beijing airport; the man turned out to be one of his academic hosts. Friedman’s lectures in praise of free markets were met with bewilderment. His assertion that capitalism was superior to socialism disturbed the Chinese greatly. Some of the more agitated Chinese economists went in a delegation to Friedman’s hotel to lecture him about the achievements of their regime.
Friedman, who (erroneously) saw Japan and South Korea as brilliant examples of open, competitive markets, was understandably impatient in China; the country embodied everything that was wrong with government planning. Indeed, China in 1980 was just lurching out of Mao Zedong’s calamitous experiments. Deng Xiaoping’s government was trying to improvise new solutions to the country’s economic backwardness, which officials thought had exposed China to humiliation in the 19th and early 20th centuries. “Development,” Deng said, “is the only truth. If we don’t develop, we will be bullied.” And national development, in Deng’s view, could be achieved by a variety of means. His flexible attitude was summed up by a much-popularized Chinese maxim: “Cross the river by feeling for the stones.”
The Chinese couldn’t help bristling at Friedman’s blunt dismissals of their government. Despite horrific disasters, the Chinese state had drastically raised literacy and life-expectancy levels. Also, the Chinese were then seeking a third way: They looked to Japan and Singapore rather than the United States for economic models that would accelerate growth without endangering the authority of the Communist Party. The Chinese saw little of value in an American proponent of laissez faire. Friedman left China, angrily claiming that his hosts were “unbelievably ignorant about how a market or capitalist system works.”