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China and Free Trade: A Failureto Recognize Externalities

Nov. 30, 2008 3:45 AM ETFXI, PGJ, CAF
Jesse Veverka profile picture
Jesse Veverka

As the current financial crisis deepens and talk of Chinese cooperation in bailing out the US and world economies becomes a reality, many economists and policy analysts expect the Obama administration to effectively turn a blind eye to what have previously been contentious issues in US-China relations, such as human rights, Tibet, Taiwan and Chinese military expansion. At the same time, President Bush has been extolling this crisis as an opportunity to recognize the need for increased free trade. Although there are those not only on the Chinese side, but also in industry, government and academia in the US who cheer this “maturing” of relations between the two countries as evidence of the success of the economic integration and interdependence that liberalized trade and investment has brought, it is important to consider carefully the true nature of the costs of free trade.

First it is necessary to define what is meant by “free trade.” It is used here to cover both the governmentally unrestricted and unhindered flow of goods and services, as well as what is often considered a corollary, the free flow of capital and investment across national borders. In addition, it is taken to also mean such related concepts as the free flow of information, freedom of access to markets, and the absence of any policies that function to influence, distort or limit trade and investment. To be sure, free trade in this sense is truly a derivative of laissez-faire economic philosophy. The US does not yet have what is strictly speaking "free trade" with China (there is no US-China free trade agreement), however, US-Chinese trade relations are substantially approaching that extreme.

Although neoclassical economic theory recognizes that free-trade does result in the picking of individual “winners” and “losers” within a given economy, it can be shown analytically, through the use of simultaneous equations

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Jesse Veverka profile picture
Jesse Veverka holds an M.S. in aerospace engineering and B.A. in economics from Cornell University. He worked as an analyst at Bear Stearns from 2000-2002. He currently lives in Japan where he is producing a feature-length documentary film tentatively entitled “China: The Rebirth of an Empire.” His academic interests center on economics, political economy, public policy, East Asian languages, cognitive science and linguistics.

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