Why Did the US Pass China PNTR?

The lessons of America’s worst trade decision remain unlearned.

It should be clear to all but the most ardent free-trade globalists that the U.S. decision to green light China’s accession to the World Trade Organization did not work out as planned. But how could such a grievous mistake have been made? It boils down to a deadly combination of idealism, hubris, group think, and first-order thinking.

Since the end of World War II, the United States has seen itself in a role like St. Paul’s as it has taken up the mission of spreading the creed, not just of democracy and freedom, but also of free trade, which most policy elites view as a key enabler of the former. Indeed, after it became the global hegemon, the idea of free trade was something that the United States pushed with its proposal for the International Trade Organization (which Congress rejected because of concerns over sovereignty). It then championed the expansion of trade through multiple GATT rounds, and then in 1995, the creation of the World Trade Organization.

Soon after, the People’s Republic of China began to press for membership, because it knew that it needed foreign direct investment as the first phase of its development plan, and it understood that the certainty the WTO gave foreign investors was critical.

And so, the Clinton administration came to promote China’s accession, successfully urging Congress to pass permanent normal trade relations (PNTR) with China in 2000, which helped pave the way for China to join the WTO in 2001

But why did policymakers agree to all this, especially given that China was, and is, a socialist economy? The easy answer is corporate lobbying, as companies wanted access to Chinese markets for sales and production. But while lobbying matters, U.S. policymakers are not completely subject to lobbying forces. The reality is that most of the supporters of PNTR actually believed it to be in U.S. interests.

Why was that?

One reason was that they took the PRC’s promises seriously. U.S. officials treated these commitments as if would any other commitments from a democratic, rule-of-law nation. This is why the U.S. Trade Representative could write that the agreement would prohibit technology-transfer requirements on foreign companies seeking to do business in China; make the PRC radically reduce its rampant intellectual property theft; identify and reduce industrial subsidies; and treat state-owned enterprises no differently than foreign enterprises. None of which happened.

To be sure, if China had actually been serious about meeting those commitments, the harm that China’s rise did to U.S. manufacturing would have been dramatically reduced. But in hindsight, you have to ask, “what were they smoking” to actually take PRC officials at their word. Any China scholar knew that since the rise of Chinese Communist Party in the 1930s, their stated commitments could not be counted on reliably.

This is especially interesting given the fact that Long Yongtu, China’s chief negotiator for WTO accession, said in an interview in May, “When we promised to adopt a market economy, we made it absolutely clear that it would be a socialist market economy.” Maybe U.S. negotiators only heard the last two words, or maybe they thought it would at least be better than a socialist command economy.

The Failure of WTO Enforcement

Some defenders of the PNTR decision will argue they didn’t have to believe the Chinese promises of pink unicorns; they were relying on the WTO to hold China’s feet to the fire. Indeed, the belief was that the WTO system would be so powerful that member nations would be forced to become not only free traders (something China has never sought to be), but also part of the Western liberal order. The reality turned out to be that once the Chinese wolves were let in the WTO henhouse, real enforcement was impossible.

This was true for at least two reasons. First, most of what the PRC did to gain unfair advantage through non-market means was “off the books.” The CCP knew that if they codified these practices into law or regulations, it could be used against them at the WTO, so they used informal administrative procedures and “guidance” that got around the WTO rules. This is why a CCP official could say to me with a straight face that China does not require tech transfer for market access. If he means that the PRC has no law requiring it, he’s right. If he means that the CCP doesn’t require it, he’s lying.

Second, U.S. and WTO trade enforcement both ultimately depend on aggrieved parties bringing cases. In the Senate proceedings on the vote, Senator Frank Lautenberg (D-NJ) stated:

Through China’s WTO accession and the establishment of PNTR, we will be able to hold China accountable for its trade commitments through the WTO’s transparent, rules-based dispute settlement mechanisms. If China arbitrarily increases a tariff on an American product or engages in retaliatory actions against the U.S., we could seek redress under WTO regulations… But if we fail to grant PNTR for China, WTO dispute mechanisms will not be available to us.

But U.S. companies quickly learned that if they asked USTR to bring a WTO case, the CCP’s punishment would be swift and severe. So, like any rational actor, they kept their heads down and just took it. As Harry Broadband, Assistant U.S. Trade Representative from 1991 to 1993, stated:

A lot of U.S. firms would come to us and they would complain about Chinese [imports] and say that we had to put in place safeguards, but they’d always add, ‘Don’t tell the Chinese that we came to you and told you this!’ … They knew that if we started punishing the Chinese in a particular sector, they were going to know that it was Company X and Company Y [that complained].

But with any level of understanding of the CCP’s history and operations, both of these behaviors (guidance rather than laws, and mafia-like threats to complainers) and more, should not have been a surprise.

First-Order Thinking

Another reason U.S. policymakers had faith in PNTR was first-order thinking, which went like this: China has high tariffs. With PNTR and WTO, they will have low tariffs. Ipso facto, U.S. exports will go up.

But these believers overlooked three key factors. First, opening up China’s markets also meant opening up our markets. In theory, this should increase both U.S. exports and imports, so the net employment effect on the United States should be zero. But they seem to have overlooked the import part.

They particularly overlooked the offshoring and import part. There was virtually no discussion during the Senate speeches on PNTR that one major result would be American firms moving production to China for export back to the United States. If anything, the view was that low tariffs on exports to China would lead to more production in the United States. Senator Kit Bond’s (R-MO) comments reflected that rosy scenario:

The benefits are not limited to agriculture, despite what has been argued, benefits do extend to manufacturing and other sectors. For example, one company in my state, Copeland, a division of Emerson Electric, manufactures air conditioner compressors in the wonderful town of Ava, MO. Those compressors are sent to China where they are incorporated in units sold all over Asia. As the market for air conditioners in Asia has expanded, the number of manufacturing jobs in Ava have grown. Those jobs will not go to China and if this agreement is passed the manufacturing jobs in the Ava facility are expected to double.

After China was let in the WTO, Copeland proceeded to establish 3 factories in China and multiple R&D facilities.

Third, policymakers over indexed on tariffs. Tariffs are only a small part of how a country can unfairly boost its trade surplus. Devaluing its currency usually has even larger effects, something China did with abandon. As do industrial subsidies, which as Haley and Haley have shown were massive and played key roles in China becoming a manufacturing powerhouse. As does IP theft and forced tech transfer.

Fourth, policy makers thought free trade was the end in and of itself and it was America’s manifest destiny to bring not only democracy to the world, but free trade. In the senate debate over PNTR, Senator Mike DeWine (R-OH) stated:

The fact is, as we all know, the United States is a leader in the area of free trade. If we fail to pass the PNTR legislation, we would be sending a signal to the world that the United States wants to isolate China. That’s a signal we don’t want to send. Both by word and deed, the United States must be the world’s leader in promoting free trade.

It was never clear why the United States needed to be the leader, although history makes it clear that presidential administrations, supported by the State Department, have long been willing to sacrifice U.S. techno-industrial capabilities for the foreign policy goals of ensuring global democracy and free markets. Many of the key advocates for PNTR, including President Clinton, used foreign policy arguments to justify it. Senator Durbin (D-IL), in explaining his support for PNTR stated, “Trade is the future. Make no mistake about it: trade can open up the exchange of ideas—ideas like democracy, freedom of speech, freedom to worship, and freedom of association.”

In other words, the U.S. goal was to help China become freer. The hope was that economic liberalization would pave the way for political reforms and a greater alignment with democratic values and institutions. Indeed, virtually all the Senate opposition was based on concerns for human rights in China, not on whether the deal would be good for U.S. techno-economic capabilities and strength.

Fifth, policymakers assumed continuing U.S. tech dominance. This was after all, the late 1990s, when the U.S. technology boom was in full swing: Intel, IBM, Lucent, Microsoft, Motorola, and others. China, in contrast, could hardly afford bicycles. So, consistent with conventional trade theory—something PRC leaders never accepted—the agreement would allow the United States to specialize in high-tech, high-value goods and services, while China would supply us with t-shirts and Happy Meal toys. The fact that Chinese unfair competition helped weaken or kill Intel, IBM, Lucent, and Motorola appears to be conveniently glossed over.

Water Over the Bridge

As they say, this is all water under the bridge—or, more like water from a broken dam that destroyed the bridge. What is done is done.

The key question is, can we learn from those mistakes going forward? Yes, there are three main lessons, none of which the Trump administration appears to be taking to heart.

First, U.S. policymakers, pundits, and journalists need to be much better at thinking two, three, or even four moves ahead of our adversaries. Simply repeating bromides like “trade is the future” does not cut it. Nor does unreflectively sticking to team loyalties. (“I am against Trump, so I will continue to repeat globalist bromides.”)

Second, policy processes, both in Congress and in administrations, need to be much more deliberate and averse to group think. Whether this entails formal red and blue teaming or other mechanisms to encourage airing a wide variety of expert views, the USG needs to become much better at this. Current interagency processes fall far short.

Third, trade policy has been dominated by lawyers: The task was to eliminate trade barriers, which are still believed to be laws and regulations, so lawyers were the ones who you wanted to lead the charge. But while lawyers can tell you if a contract is good or not, they can’t tell you if it’s the right contract.

Case in point. If trade policy in the 1990s had been led by techno-economic industrial policy strategists, one of the things they surely would have pointed out (if they were any good) was that manufacturing tends toward agglomeration, and if a nation like China could gain adequate momentum—which it has thanks to low costs, forced foreign direct investment and tech transfer, and a global free trade regime that prevents other nations from taking action against unfair practices—it could lead to a vicious cycle where China first becomes the global manufacturing powerhouse and then graduates to become the global innovation leader (as we are now seeing). Meanwhile, other former leaders, including the United States, would lose capabilities, including in the industrial commons, and suffer largely irreversible techno-industrial decline. But individuals with those insights and capabilities were few and far between in the federal government (and they remain so), and to the extent they are there at all, they are like Milton in Office Space, stuck in the basement without his stapler.

Finally, it’s time once and for all to end utopian globalist thinking about free trade. It was a wonderful John Lennon-like vision, one that even looked attainable after the fall of the Soviet Union. But until the PRC is replaced by a true democracy, global free trade will be impossible. They will simply not play by fair rules.

As such, we will need to go back to a pre-1990 trade regime, with the free world economically integrated, and the Communist world limited. That doesn’t mean the same level of isolation that was imposed on the Soviet Union. But it does mean replacing free trade, not with Trumpian protectionism, but with strategic international economic relations. That will be the subject of a forthcoming post.