Why Have Economists Been So Enamoured with Increased Economic Integration with China?
Part 2 in a Series on Absolute Advantage, Comparative Advantage, and Gains from Trade
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Now onto the show.
Introduction
In my previous issue of this newsletter, I explained why free trade between two jurisdictions can lead to gains from trade on both sides of the deal; although there are indeed winners and losers in each jurisdiction, the gains will outweigh the losses. I also compared these conclusions to historical views on the gains from trade from Plato and Aristotle to the mercantalists of the 18th century.
This conclusion that free trade is mutually advantageous has motivated world leaders since WWII to pursue trade liberalization agreements globally. Proponents of these agreements even argued that trade liberalization could be instrumental in spreading democracy and free markets around the world — not to mention the economic benefits trade liberalization would bring to our own jurisdictions.
Indeed, governments in the Western world like Canada and the U.S. have tried to become more economically integrated with China for that very reason, going back to President Richard Nixon’s infamous visit to China in 1972, and also to Prime Minister Pierre Trudeau’s attempts to improve our relationship with China. This continued over the years to include the Stephen Harper and Justin Trudeau governments. See my post here for a more detailed history of Canada/China relations.
As shown in that historical overview, there were periods where China did indeed seem to become more democratic and open to free markets. However, a lot of cold water has been thrown over our heads during the rule of Chinese President Xi Jinping. It is for that reason I recommended trade barriers against China here.
But the fact remains that prior to the rule of President Xi, economists were very much enamoured with free trade with China for reasons identified above. So it is the purpose of today’s newsletter to explain why we believed it, and why our focus — while still reasonable — was too limited.