Last week’s edition of The Economist featured a fascinating cover story on the rise of state-controlled capitalism, ending with their position that (I’m paraphrasing) companies as successful as those in China should, in theory, be as successful without intervention. Their point is that, while China may have some qualities of a capitalist economy, it is ultimately not a free market. So why does U.S. economic policy keep approaching it as such?
In a rare show of unity, the White House and Congress are resorting to legislative means to undo a judicial ruling, GPX International Tire Corp. v. United States, in which a U.S. tire company blamed its bankruptcy filing on the government for not imposing countervailing duties on Chinese imports. You’ll recall that a countervailing duty is applied to exports that are subsidized by their country of origin and can be shown to cause material harm to competitors. The court ruled that these standards do not apply to a non-market economy like China.
First-year business students learn that there is, and has never been, no such thing as a purely capitalist economy. There is always some government ownership somewhere, i.e. infrastructure. As this beauty of a film taught us, though, there are specific criteria for a market generally regarded as “free”: private property, the profit motive, competition, freedom of contract and legal guarantees of all of the above.
What isn’t said is the assumption that these can only be enjoyed by individuals and individually-owned companies to add up to capitalism. You can’t fit exports from state-controlled companies under this paradigm, even if they are engaged in international trade for profit and have competitors. They are not privately owned and do not enjoy freedom of contract from the government. This creates far more distortion than can be recognized in an export that was merely subsidized, as many U.S. exports are.
The White House and Congress may not like it, but their own predecessors encouraged trading with China and similar economies before they either became “market” or decided they would at some point. China is getting plenty rich, not because of state capitalism in and of itself, but because real market economies don’t understand the rules of their game. Allowing China into the World Trade Organization (WTO) was a big, juicy carrot without a stick, and American businesses are getting prodded.
GPX International Tire Corp. was at least partly right to blame the government for its problems. But it wasn’t because they didn’t impose duties on Chinese tires. It was because they put themselves into a position in which they couldn’t.