A Note on China

On an earlier post, frequent commenter Greg G writes in two separate comments (condensed here for readability):

I think the best argument for tariffs is the astonishing economic success of China in lifting so many people out of poverty in such a short time. It’s not easy to explain how they did that if tariffs are really so inimical to the interests of their own people. Those of us in favor of free trade (and I count myself among that group) need to admit we can’t explain that. As always, we could argue that they would have done even better in some counterfactual where everyone listened to us but that is a very weak argument for a couple reasons. One is that it is always available to everyone. The other is that none of us would have predicted in advance that such an economic miracle was possible even if we had been guaranteed we could dictate policy.

Free market theory predicts that all these state interventions should be bad for Chinese consumers yet no other country’s consumers in history have enjoyed a comparable jump in their standard of living in such numbers in such a short time. Yes, I know they started from a place of extreme poverty and even more Draconian state interventions where it was easy to make big percentage gains. Even so, there are countless other countries that started in extreme poverty and stayed there both with and without a lot of state intervention in the economy. I am not pushing any economic theory that I prefer to free trade but I do still think that the Chinese example stands as a challenge to some of the economic theories that we prefer. It’s at least a little bit awkward that the regime that engineered the biggest economic leap forward in history still calls itself Communist.

Let me begin with a quick point.  Free market theory does not predict that all state interventions are bad.  There are many theoretical cases where interventions such as tariffs can be beneficial.  However, such theories require strong assumptions and a level of knowledge we deem impossible to possess, so we are skeptical of the applicability of such arguments.

More specifically on China:

Greg is right to wonder about China’s massive increase in wealth over the past 30 years.  It is astonishing.  Does it represent trouble for the free market thesis?  I don’t think so.  It adds a lot of credence, indeed.  China has been rapidly reducing tariffs over the past 30 years.  Non-Tariff barriers are falling, too.  In short, China opened their markets to the international market.  I think this has contributed to their economic growth.  It could be better, sure, but they’re steps in the right direction.

However, I fear if China does not institute market reforms, they could find themselves stagnating.  Japan had a similar growth strategy as China in the 70’s and 80’s.  They saw rapid growth but subsequently stagnated from 1990 to present as their protected firms became moribund and unable to handle competition or anticipate market changes.  Unless they allow true market reforms beyond what they already have, China will likely also face such stagnation, albeit at a higher level than Japan.

5 thoughts on “A Note on China

  1. You convinced me on your point about tariffs Jon. But I think the evidence goes the other way on non-tariff barriers. We still don’t have any theory that would predict that the country with the greatest success in all of human history at lifting the most people out of poverty in a single generation would come from the bottom half of all countries for economic freedom.


    • Greg, we DO have the Ron H. theory that freer trade and more consumer choices are a much more important condition for prosperity than other non-tariff barriers. 🙂


  2. Very interesting that according to your World Bank reference, tariffs world wide, with few exceptions, have decreased dramatically in the last 30 years. I had no idea.

    Just eye-balling the ‘:All Countries & Economies list’, it would seem that some of the wealthiest and highest growth countries have the lowest tariffs (including Hong Kong, Singapore, Macao, and Switzerland with zero), and that some of the poorer countries (Bangladesh, Kenya, Nepal, Nigeria) have some of the highest tariffs. I wonder if a scatter plot of all countries would show some interesting correlation?



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