On June 30, 2020, the Senate Finance Trade Subcommittee held a hearing on Censorship as a Non-Tariff Barrier. It was a pleasure to testify. The hearing can be seen here, and my written testimony can be found here.
My opening statement:
My name is Beth Baltzan, and I am a fellow at the Open Markets Institute. I have been a trade lawyer for nearly 25 years. I have worked at USTR, the Public Company Accounting Oversight Board, the Senate Permanent Subcommittee on Investigations, and the House Ways and Means Committee. All of these experiences inform my testimony today.
In 1989, Francis Fukuyama published an influential article called “The End of History?” He argued that the imminent dissolution of the Soviet Union reflected the triumph of economic and political liberalism – and that economic liberalism would pave the way for political liberalism globally. This view permeated the zeitgeist when we designed the WTO, and when we let China into it.
Developments in China have shattered that theory. Rather than democratizing as a result of its integration into the global economy, the Chinese Communist Party has weaponized that integration, using its economic leverage to quash the rights of foreign citizens in their home countries. Economic liberalism has become a vector for political illiberalism.
Fukuyama has recognized his mistake, going so far as to identify Chinese state capitalism as the most salient ideological threat to democracy.
When we look at the actual rules of globalization, we see how this came to pass. In designing the rules in the 1990s, we focused on liberalizing capital flows, believing that a laissez-faire model would produce ideal economic and political outcomes. We did not guard against a government that would exploit that system with a fundamentally anticompetitive, zero-sum strategy. It is that anticompetitive strategy – not natural comparative advantage — that has led us to be economically dependent on an authoritarian regime.
It’s wrong to say we couldn’t have seen this coming. The founders of the multilateral trading system foretold this outcome — and sought to prevent it. They designed a regime grounded in fair competition. Cheating through currency manipulation, labor rights suppression, or monopolistic behavior was prohibited.
They presciently warned that without these rules, state trading governments – uber-monopolists — would destroy free enterprise – and democracy.
These rules were memorialized in the Havana Charter, signed in 1948 by over 50 countries. But it never entered into force.
It’s popular lore that an isolationist Congress rejected it. But that’s not accurate. The Charter failed because the American business community rejected it.
We managed to forestall the immediate threat to democracy and free enterprise by keeping the Soviet Union out of the GATT. But we did allow the PRC, a modern state trading government, into the WTO. And the prophecy now seems to be coming true.
It is not too late to mitigate the risk. Addressing the CCP’s ability to interfere in our civil liberties requires us to reduce its economic leverage over us. I offer five recommendations.
First. We must address our supply chain dependency. So much has changed since early March, when this hearing was first scheduled. People now understand, in very real terms, what it means to have a supply chain dependency problem on China.
Fortunately, for the first time since the 1970s, the United States is having a conversation about strategic industrial policy. We need to identify critical sectors, map out supply chains, and ensure we have diverse sources not just of finished goods, but of components as well.
Second. We must recognize that unless we reform the systemic global trading incentives, it will be difficult for us to sustain supply chain diversification. As long as the rules tolerate anticompetitive inducements to offshore, we must anticipate that any newly rebuilt supply chains will eventually end up back where they started. Therefore, we need the right slate of reforms at the WTO. The narrow focus on subsidies is grossly insufficient to deal with the much more structural problem of the CCP’s anticompetitive approach to trade.
Third, and related to the question of sustaining supply chain diversification: We must keep an open mind about tariffs. Tariffs can be a useful tool for driving behavior. The United States has the lowest bound rate at the WTO; that low rate, coupled with anticompetitive CCP behavior, has made it particularly lucrative to offshore American production and export it back. Until we have achieved global reform, we must consider tariffs to be one way of incentivizing the sourcing we want.
Fourth. We should work with our allies – but be realistic. Many of our allies simply do not — yet — see the CCP as a threat to economic, and political, freedom. However, supply chain diversification is one area where we can cooperate with countries that share our values.
Fifth. We must accept that true market access in China is illusory. The CCP will give us exactly as much market access as they want to. The more we telegraph that we believe unfettered market access is possible, the more leverage they have over us. Being a market access demandeur puts us in a position of weakness, and increases their ability to interfere with our civil liberties.
Thank you for the opportunity to present these views.
