Nov. 30, 2019  — The “bicycle theory” used to be a metaphor for international trade policy.  Just as standing still on a bicycle is not an option — one has to keep moving forward or else the bike will fall over – so it was said that international trade negotiators must continue to engage in successive rounds of liberalization, or else the open global trading system would be pulled down by protectionist interests.  I don’t know if the theory was ever right.  (And, to be honest, I don’t entirely understand why forward movement keeps a bicycle from falling over.)  But if we had stood still on trade policy over the last three years we would be a lot better off than where we are now.

Trade is faltering — global trade volumes shrank an alarming 1.1 per cent over the 12 months —  but the cause is a chaos of inept riders on colliding bicycles, rather than the inertia of special interests.

Let’s look ahead to a day when grown-ups are again riding the bicycles.  What sort of trade policy should they pursue?  It is not a futile question to ask, even though many Democratic politicians share Trump’s view that we need to “get tough” with trading partners.

An historical example illustrates how the political trends can shift. The US Smoot-Hawley tariff of 1930 and the foreign retaliation that swiftly followed were the height of protectionist folly.  But eventually they came to be widely perceived precisely as folly.  The Roosevelt Administration passed the Reciprocal Trade Agreements Act in 1934.  After World War II it became the basis for several generations of multilateral trade liberalization, which in turn contributed to a long period of widespread peace and prosperity.  Throughout, Smoot-Hawley was remembered as the cautionary tale to be avoided.

Deep versus shallow integration

We could do worse than return to the post-war formula of negotiating reciprocal elimination of tariffs. The suggestion sounds old-fashioned.  After all, another familiar truism has held that we have largely completed the job of so-called “shallow integration,” that is eliminating such straightforward trade barriers as tariffs and quotas, and that further progress now requires “deep integration.”  Deep integration would entail mutually agreed rules for regulating the business environment.  This involves a lot of potentially worthy measures, to be sure.  But it now appears too ambitious.

An ultimate example of deep integration was 1980s decision by the members of the European Common Market to go beyond the integration of a free trade area, in pursuit of full European Union and even a common currency.  That was evidently a bridge too far, at least for the Brexit-plagued UK.

A promising example of negotiations toward deep integration more recently was the Trans–Pacific Partnership of 2015.  It included steps of interest to business, such as some regarding intellectual property rights and investor-state dispute settlement, as well as steps of interest to others, such as serious enforcement of labor rights and environmental protections.  But Donald Trump withdrew from it; and the Congressional Democrats had been unsupportive anyway.

Technology transfer and market access in China’s auto sector

A salient current example of attempted deep integration are US demands that Chinese firms refrain from conditioning their willingness to enter joint ventures with American firms — those who wish to set up operations in China — on the sharing of the foreigners’ proprietary technology.  Many US economists support these demands.  (Few economists, by contrast, support such other Trump objectives in its China negotiations as agreements to manage bilateral trade quantitatively or to stop non-existent “currency manipulation.”)

Many economists, while conceding that Trump’s goal regarding technology transfer in China is valid, would argue that he has gone about it all wrong.  The sensible strategy would have been for the US to make common cause with other major countries to put pressure on China, preferably via multilateral institutions such as the WTO.  After all, German auto-makers have as much at stake in China as American firms.  Instead, he has imposed tariffs on most trading partners and undermined multilateral institutions.  Further, he has given China little reason to enter into a meaningful agreement, by showing that he does not abide by agreements.

Could a successor president, who went about it in a better way, get the job done?  Probably not.  For one thing, regulating technology transfer would be very tricky in the best of worlds.  It is a subtle process. Typically there is not an explicit quid pro quo [to use a newly popular phrase] initiated by the Chinese firm.  Still less is there one initiated by the Chinese government.  Often the offer of technology-sharing has been initiated by the foreign corporation, to make it attractive to a local firm as a partner in a joint venture.  How could a government regulate such a subtle process?

The answer may be for the Chinese government to remove altogether the requirement that foreign firms have a local partner if they want to do business in China.  Recent steps in this direction have been taken in the financial sector and the auto sector.

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