Book review: Paul Blustein: Schism: China, America, and the Fracturing of the Global Trading System (CIGI Press, 2019)

Paul Blustein has produced an enviable bookshelf of behind-the-scenes reportage on international economic institutions, both as a journalist (for The Washington Post and The Wall Street Journal) and as the author of books such as The Chastening (the International Monetary Fund’s role in the 1998 Asian crisis), Off Balance (the IMF and the Bank for International Settlements during the 2008 crisis), and Laid Low (the European crisis of 2010). His insider sources – especially in international bureaucracies – provide veracity, verve, and colour.

His latest book, Schism, examines how the World Trade Organisation failed to adapt to China’s emergence as “manufacturer to the world”, with its economic system fitting awkwardly into the existing multilateral framework. Superimposed on these initial tensions, US President Donald Trump’s bullying tactics have thrown a spanner into the mechanism of global trade.

The story begins with the drawn-out process of China’s admission to the WTO, finally achieved in 2001 after years of arm-wrestling negotiation with the US, which acted as gatekeeper for WTO entry. China, under the guidance of reformist Premier Zhu Rongji, made many concessions to adapt to the WTO framework and to placate America’s concerns that China’s size, coordinated decision-making, state-owned enterprises, and subsidies would enable it to compete too effectively.

Blustein doesn’t doubt that it was appropriate to admit China (what was the realistic alternative?) and that the US bargained hard and effectively. He cites the tough tactics used, including all the usual tricks that Trump would later claim as his unique expertise.

American politics often intruded into the extended timetable, with Congress’ characteristic intransigence always threatening agreement. Tiananmen in 1989 further delayed agreement.

After 2001, things didn’t work out as America expected. Some (but by no means all) expected the accession would be a catalyst for shifting the Chinese economy towards the American model in both economics and politics. More importantly, few expected China to be so spectacularly successful in exporting manufactures. Looking back, this success was attributed to China’s currency manipulation, intellectual property (IP) theft, forced IP transfer, subsidies, state interference, unfair labour practices – in short, everything except the reality that a very large low-cost manufacturer had entered the market with dynamism and entrepreneurial determination.

The loss of manufacturing jobs was more a result of technology than of Chinese imports (Photo: Thomas Hawk/Flickr)

The “China Shock” was painful for US manufacturing. Early analysis showed that the loss of manufacturing jobs was more a result of technology than of Chinese imports. But in time, it was recognised that some geographic areas had been unable to adapt. In the heat of this revisionist debate, not much account was taken of the many opportunities opened up by the China trade, including in overseas investment. The rise of supply-chain production took away some American jobs, but allowed others to compete in world markets by shifting components of low-skill production overseas, leaving the higher-skilled (and lucrative) value-add to be done in America.

That said, there is no doubt that the China Shock was painful and politically decisive in Trump’s election in 2016. The transition was also painful for China, but it was a crucial element in the transformation which has taken 800 million people out of poverty.

Blustein dismisses the importance of the Trans-Pacific Partnership: America’s departure was a minor loss to the cause of global trade.

The post-2001 period saw American hostility escalate over time. Under George W. Bush, there was still hope that China might be changing “in America’s image”. Barack Obama increased the pressure on China, with the use of “safeguards”, vigorous anti-dumping actions at the WTO, and an effective end to “currency manipulation” – the renminbi undervaluation. Xi’s elevation in 2012 modified the direction of China’s economic development, reversing Zhu’s shift towards private markets.

Then came Donald Trump, with his fixation with the bilateral imbalance and inflated view of his bargaining ability. Some complaints were irrelevant (e.g., the bilateral imbalance), while others were immutably intrinsic to China’s sovereignty (state capitalism). Other issues such as subsidies and state assistance were more prevalent in China, but America is hardly without sin in this regard. As for intellectual property, the system has been distorted by abuses (trivial patents, evergreening medical patents).

Blustein dismisses the importance of the Trans-Pacific Partnership: America’s departure was a minor loss to the cause of global trade. He asserts that it was never intended to contain China.

The detailed “tick-tock” storytelling enlivens what might be a dull narrative. What did Trump and Xi eat at the 2018 APEC Buenos Aries dinner? Grilled sirloin, if you’re wondering. But this is just decoration – the book has strong analytical substance and sound conclusions. Even at this late stage, Blustein argues that Trump should work with traditional US allies to restore the role of the WTO, the vital centrepiece in the indispensable multilateral framework.

We might make more sense of the conflicting views (even among the Americans, let alone between the Americans and the Chinese) if we identified three different mindsets among the protagonists.

First, textbook economists see trade in black and white. Free trade maximises each country’s welfare, even if it requires some internal redistribution to achieve equity. Tariffs harm everyone, including the country imposing them. Bilateral imbalances are irrelevant. Comparative advantage allows countries to benefit from their legitimate intrinsic advantages, such as low labour costs. Subsidies benefit the recipient and harm the subsidiser. Most developing economies (and Japan) have used competitive exchange rates during the catch-up phase. The free-market trading system is largely self-regulating, requiring very little intervention or regulation to achieve optimal outcomes.

The second group accepts the benefits of international trade but also believes that an individual country can gain a bigger share of these benefits by tough tit-for-tat bargaining. Tariffs might be a valid tactic of this bargaining process. The whole of the WTO bureaucracy and the tortuous post-war “trade-rounds” have operated on this basis.

The third group identifies overriding security concerns and would be prepared to limit trade – perhaps even seeking decoupling – in order to minimise the security threat from China.

The diverse and contradictory arguments, motivations and actions can be better understood in these terms: no consistent rules can satisfy these divergent mindsets. The WTO has serious deficiencies, and few of the members behave as they should. But for all its imperfections, this multilateral approach has been a key element in the huge increase in global living standards since the Second World War.