The politics of Trade

The post WWII history of international trade and the World Trade Organization has been one of gradual liberalization, i.e., a gradual roll back of tariffs and other trade restrictions. Each side offering freer imports in exchange for freer exports. But the game can work in revers as well. The U.S. has restricted –actually banned—the export to China of high end semiconductors that it fears might have military uses in China. China has responded by banning the export to the U.S. of rare materials needed to produce these chips. It sounds a bit like a joke—a bad joke.

Poor Janet Yellen, who is now visiting China. The Secretary is as sharp as they come but is in the middle of this impossible game.

“U.S. Treasury Secretary Janet Yellen criticized China during a visit to Beijing for imposing export controls on critical metals, expanding subsidies for state-owned firms, and imposing punitive measures on foreign businesses. Her harsh remarks spotlight the gulf between the U.S. and China, and the difficulty of translating calls for improved ties into actual improved ties. A top Chinese official told China Daily that the curbs on metals exports were “just the beginning” of efforts to combat U.S. restrictions on China’s semiconductor sector, and warned that Beijing could yet “escalate” if Washington were to toughen its rules further, a move it is reportedly considering” Semafor Flagship July 7, 2023

But as reported by Bloomberg she had more positive things to say as well:

“Yellen Says US-China Rivalry Not ‘Winner-Take-All’ Situation (Bloomberg)

U.S. Treasury Secretary Janet Yellen said competition between the world’s biggest economies is not a “winner-take-all” situation, and called for both sides to manage their rivalry with a fair set of rules. Yellen’s comments were delivered today during a meeting with Chinese Premier Li Qiang as she made a long-anticipated trip to Beijing, aimed at finding some common ground between the two superpowers. “We seek healthy economic competition that is not winner-take-all but that, with a fair set of rules, can benefit both countries over time,” the Treasury chief told China’s No. 2 official, adding that U.S. actions to protect national security should be “targeted.” Li also struck a note of optimism, telling Yellen he believed bilateral ties would eventually see a “rainbow,” after going through a period of “wind and rain.” He also urged Chinese entrepreneurs to brace themselves for “hardships” and “look further to the horizon.” From IMF News Report, July 7, 2023

Yes, these are from the same trip. How it turns out is anyone’s guess. But a return to freer trade is in everyone’s best interest—win win as we say. National security can be a legitimate (sensible) reason for restricting trade. But it must be very carefully applied if it is not to degenerate into counterproductive protectionism.