In the first presidential debate, Joe Biden said Donald Trump “talks about the Art of the Deal. China perfected the Art of the Steal. We have a higher [trade] deficit with China than we did before.”
The two agree on one thing: China has been stealing American technology and selling it back to us, running up huge trade surpluses and putting millions of Americans out of work. More must be done about it. It is an existential threat.
America’s Founding Fathers faced the opposite problem. Alexander Hamilton, George Washington and others believed that manufacturing was essential to the new nation’s survival. But England, the industrial power of the age, prohibited not only the export of textile machinery and designs – the high tech of the 18th century – but also the emigration of skilled workers.
Accordingly, the Americans would either have to steal the technology or entice Englishmen to steal it for them. In his “Report on Manufactures,” published in 1791, Secretary of the Treasury Alexander Hamilton recommended rewards for those who brought “improvements and secrets of extraordinary value” to America.
Spies were dispatched, agents recruited, funds made available. Samuel Slater, an apprentice in England, stole textile machinery designs and took them to the US, where he became a successful businessman, establishing more than a dozen textile mills with their own farms and company towns.
Andrew Jackson called him “The father of the American Industrial Revolution.” In England, he was called “Slater the Traitor.”
We learned about this American hero in school. Those who are interested may visit the Slatersville Historic District in Rhode Island.
The Patent Act of 1793 provided for the granting of patents to Americans who had stolen technology from England and other countries, while prohibiting foreign inventors from receiving patents in the US. Patent protection was not extended to foreign inventions until 1891.
For more detail on this subject, read Trade Secrets: Intellectual Piracy and the Origins of American Industrial Power by Doron S Ben-Atar and The Spies Who Launched America’s Industrial Revolution by Christopher Klein.
The Tariff Act of 1789 imposed a 5% tariff on almost all imports to the United States. The average tariff then crept up to 12.5% by the outbreak of the war of 1812, when it was doubled to 25%. In 1816, it was raised to 35%. By 1820, it was up to 40%.
In 1847, Abraham Lincoln said: “Give us a protective tariff, and we shall have the greatest nation on earth.” During the Civil War, he imposed a 44% tariff.
Ulysses S Grant, president from 1869 to 1877, stated: “For centuries England has relied on protection, has carried it to extremes and has obtained satisfactory results from it. There is no doubt that it is to this system that it owes its present strength.
“After two centuries, England has found it convenient to adopt free trade because it thinks that protection can no longer offer it anything. Very well then, gentlemen, my knowledge of our country leads me to believe that within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade.”
That was indeed the case, although tariffs and other mercantilist policies supported the growth of English manufacturing for more than 350 years, from 1489 until the repeal of the Corn Laws (restrictions on grain imports) in 1846.
Daniel Defoe not only wrote Robinson Crusoe, he reported on Henry VII’s policies to promote woolens manufacturing in A Plan of the English Commerce (1728). By the way, he also wrote A Journal of the Plague Year (1722), a horrifying and edifying account of the Great Plague of London in 1665.
American tariffs remained high while the United States grew to become the largest and richest industrial nation on earth. In 1931, the infamous Smoot-Hawley Tariff raised the tariff on manufactured goods to 48%.
In was only after World War II, when the rest of the world lay exhausted, its industry destroyed, that America became an advocate of free trade and took the lead in an international effort to reduce tariffs.
Now let’s review the intellectual arguments for free trade.
In The Wealth of Nations, published in 1776, Adam Smith wrote: “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry employed in a way in which we have some advantage.”
In 1817, David Ricardo published On the Principles of Political Economy and Taxation, in which he argued that if country A can produce good X more cheaply than good Y, while in country B the situation is the reverse, then country A should specialize in good X, country B should specialize in good Y, and they should trade to their mutual benefit. This is the theory of comparative advantage.
In Ricardo’s famous example, England produces cloth more cheaply than wine while Portugal produces wine more cheaply than cloth. England should therefore specialize in textile manufacturing while Portugal makes wine and they both earn enough money to share a bottle after work.
The part he left out is that free trade furthers the interests of the powerful. When England was weak, it was protectionist. Let’s fast-forward and rephrase Ricardo to clarify the implications.
England had a comparative advantage in automatic looms, steam engines, steel production, railways, battleships, machine guns, internal combustion engines, aircraft, electronics, medicine and science.
Portugal had a comparative advantage in winemaking, sailboats and cheap holidays, long after the Portuguese Empire became a distant memory. But the Portuguese don’t mind because they are better off this way.
The Japanese were not having any of this, not after the Meiji Restoration of 1868, when they adapted to European and American imperialism, and not after they lost World War II.
The GATT (General Agreement on Tariffs and Trade) took effect at the beginning of 1948, but the Japanese managed to first “borrow” and then work their way to dominance in consumer electronics, autos, machine tools, industrial robots and other areas of manufacturing through a combination of protectionism, industrial policy and non-stop innovation.
Until they were so far ahead that protectionism seemed no longer necessary. Inspiring South Korea, Taiwan and China in the process.
Some Americans – including Donald Trump – were alarmed, but most thought that East Asia’s success confirmed their own. Some American politicians even went so far as to say that if American companies couldn’t cut it, they should go out of business.
But Japan lost momentum, falling into its “lost decades,” while America launched the high-tech revolution. South Korea and Taiwan were of manageable size, and all three were allies.
Some American economists – including my own professors – argued that even if the other side cheats, it is in our own best interest to buy the cheapest product available. This is known as consumer sovereignty, as if a bargain sale were the be-all and end-all of economic activity. Never mind the strategic implications. Shop until you drop.
But comparative advantage is seldom intrinsic. It can be built and it can be lost. The British built it and lost it. And now the Americans have built it and lost half of it.
China (not an ally) provided the wake-up call as its GDP overtook America’s in purchasing power parity terms and its Made in China 2025 plan targeted dominance of 10 key high-tech industries – both fueled by theft of intellectual property that has been valued at hundreds of billions of dollars per year. At least.
Evan Anderson, CEO of the American consultancy INVNT/IP and author of Theft Nation: How IP Theft Drives the Chinese National Business Model and its Effect upon the Global Economy, has this to say: “Chinese IP theft, both state-sponsored and individual, remains a massive drag on inventing nations around the world.
“Polls last year showed that one in five companies had suffered IP theft at the hands of Chinese threat actors in 2019 alone. Trillions of dollars in intellectual property is stolen each year worldwide by the PRC government in this near-existential threat to innovative economies.”
As the free-trade consensus began to erode, studies from the Economic Policy Institute and other organizations confirmed the gut feeling of average Americans: Millions of jobs were being lost to China.
One-way, not-really-free trade was a bad deal. But it was too late for the ideologues to regroup. Donald Trump was elected.
Trump may not be re-elected, but in this regard, it doesn’t matter. Hillary Clinton abandoned the Trans-Pacific Partnership trade deal before the 2016 election. Joe Biden is at least as protectionist as Trump, but more systematic and reliable.
Alexander Hamilton and George Washington would no doubt appreciate China’s employment of industrial espionage as a strategic development tool. And, having dealt with an infuriated Great Britain, they would understand the reaction it has provoked.
The 1917 Trading with the Enemy Act allowed for the confiscation of German and other enemy-owned patents and their transfer to American companies. This bit of history is echoed in President Trump’s attempt to ban TikTok unless it sells its American operations to an American company.
It is also reflected in the language reportedly used last week when the US Commerce Department warned that exports to SMIC, China’s leading semiconductor foundry, “may pose an unacceptable risk of diversion to a military end-use in the People’s Republic of China.” It informed American suppliers that they “must submit an application for an individually-validated license prior to exporting, re-exporting or transferring in-country” sensitive technologies to the company.
It is, therefore, appropriate to use the words “trade war” to describe the current dispute between the US and China.
China, like Japan before it, is not about to give up its industrial development policies. Its stance was summed up by Bai Chunli, president of the Chinese Academy of Sciences: “The United States’ technological containment list will be our mission for scientific and technological development.”
China wants to own the future. The US wants to go back to a future in which its dominance is restored. The future may disappoint both.
Scott Foster is an analyst with Lightstream Research, Tokyo.