China’s State-Capitalism and the West’s Worries

This is another post that is just basically a link to another great New Yorker article… though unfortunately the article is behind a paywall… But this was one of the best articles I’ve read in the New Yorker in a long time. It was an article about China’s state-driven form of capitalism. It really explained it this protectionist, nationalistic and maybe even authoritarian form of capitalism as a part of a larger evolution. 

He points out the historical difficulties in using Russia and China as examples that people will prefer authoritarian capitalism to “open-market capitalism,” which is something I definitely worried about before… that is, before I read this article. He does this by citing the examples of South Korea, Thailand, Indonesia and Taiwan which are all democracies that basically free-market, though they were definitely on the other side of this division only 30 years ago. 

But his best part of the article is his dismantling of the myth that the economic superpowers today got to where they are on the basis of free trade. 

“From Lord Palmerston to Secretary of State Hillary Clinton, Western oddicials have long demanded that countries open their domestic markets to foreign competition. But Britain and the United States embraced free trade as an ideal only after they had built up manufacturing industries that could dominate those of foreign rivals… In 1721, the [British] government of Robert Walpole placed a range of tariffs on all manufactured imports, erecting a protective wall around businesses that created the Industrial Revolution. A century later, while the heirs of Adam Smith were expounding the theoretical virtues of free trade, Britain retained some of the highest import tariffs in the world: more than fifty percent on many manufactured goods. Those levies stayed high until the eighteen-sixties, when the country’s competitive advantage in textiles, steel and other industries was firmly established. As the late economic historia Paul bairoch stressed, the idea that Britain rose to economic dominance through free trade is nonsense

The same is true of the United States… During the War of 1812, which was precipitated in part by trade disputes, [Congress] doubled import duties on manufactured goods, to twenty-five per cent. A few years later, the levies were raised to an average of forty per cent. Then Abraham Lincoln raised them again, to roughly fifty percent. Ha-Joon Chang, an economist at the University of Cambridge, has observed that Lincoln, revered as the Great Emancipator, “might have equally be labeled the great protector—of American manufacturing.” 

During the half century after Lincoln’s presidency, the business-backed republican part was in power for most of the time, and tariffs on manufactured goods remained at forty to fifty per cent, the highest levels anywhere. It was during these years that the U.S. economy grew to rival the economies of Britain and Germany in industries such as iron and steel and chemicals—all of which benefitted from protection.”

Cassidy goes on to talk about how protectionism still exists in the U.S. in many industries, most notably in the form of agriculture subsidies. He also shows some of the recent fruits of these American protectionist policies; to again use the most notable example, the internet was a product of the Pentagon’s Defense Advanced Research Projects Agency (DARPA).  

All of this should act as calamine lotion for those who are worried about the appeal and competitiveness of China’s state-capitalism and how that relates to the future. (And, as a Westerner who is more than a bit scared by China’s authoritarian streak, I would definitely count myself in this group… before I read this article). One of the most particular “soothing” passages is an explanation of what would happen if China got in a trade war with the West… but I’ve already excerpted too much of the article. Oh and he also puts concerns about China’s involvement in Africa, which gets a lot of attention, in a larger context that includes American involvement in Africa as well (unsurprisingly, we have a much worse track record). 

But more than that this article should remind many in the West who disprove of government coming anywhere near the economy about the benefits that government can bring to the economy — though, there are a lot of drawbacks…and I don’t think many people will see this as impassioned case for protectionism, because it isn’t. Here is how Cassidy ends his article: 

“Unfortunately, in policy circles—and among much of the general public—the old mantras about the free market and private enterprises continue to dominate. In seeking to broaden access to private health insurance, the Obama administration was accused of plotting a takeover of the entire health-care industry. In cutting taxes and boosting federal spending to avert a depression, it was accused of embracing socialism. Even supposedly serious economists lend support to these views, arguing that the dysfunctional health-care industry is best left to its own devices, or that the eight-hundred-billion dollar stimulus program has had virtually no impact on jobs and on G.D.P. This is what comes of forgetting the critical role that states have played in nurturing, protecting, and financing their industries, as well as in taxing and taming them. The greatest danger that Western prosperity now faces isn’t posed by any Beijng consensus; it’s posed by the myth of the free market.”