The Rival Trading Blocs We Make Along the Way

As I argued in A Hard Break with China, never in human history have nations with economic and political systems as different as America’s and China’s attempted economic integration. During the Cold War, integration was never permitted, or even seriously considered, by either side—the suggestion would have been regarded as plainly insane. When PepsiCo finally opened a Soviet bottling plant in 1972 after 13 years of effort, it was front page news. Rubles were not convertible to dollars, and so the Soviets paid for the bottling equipment with vodka.

ONE THING TO READ THIS WEEK

Your one thing to read this week is “China’s New Back Doors into Western Markets.” As the Financial Times reports, “an intensifying rivalry between China and the US-led west is driving a fragmentation in the world’s economic order. … In response, company executives and analysts say, Chinese corporations are setting up shop in a host of relatively non-aligned third countries, hoping they can bridge the increasingly hostile gap that divides China from the west.”

Chinese firms are using a series of “connector countries”—Singapore and Vietnam in Asia, Hungary and Ireland in Europe, Mexico in North America—to launder Chinese goods into Western-aligned markets. European countries are especially vulnerable, because the EU grants nations independence in forging external trading relationships but then insists upon free trade within the common market. Thus, for instance, Hungary can welcome Chinese auto manufacturers and the vehicles produced have automatic entrée to the German market. Ireland, long a bad-faith actor in the international tax system, seems to be going the same route on China. Bilateral trade between the two countries has increased by a ludicrous 200% in five years.

For the U.S., the problem is Mexico. “North America’s USMCA free trade agreement,” explains the FT, “means Chinese businesses making everything from fridges and televisions to textiles in Mexico gain privileged US market access. … US patience with Mexico’s role as a tariff-free staging area for Chinese companies to the US market is already running thin. … But some in Mexico City say China is too deeply embedded in Mexico to change course. In any case, there is only so much either country can do to limit China’s reach.”

This is wrong, and repeats the original mistake of the economists and analysts who deemed globalization unavoidable and irreversible. What in fact is unsustainable, and will not continue because it cannot continue, is the attempt to preserve an international trading system that integrates China’s authoritarian, mercantilist, non-market system with Western democratic capitalism. There is no coherent resting point between globalization’s full integration and the retrenchment into rival trading blocs now underway. The sooner American policymakers accept this, the sooner we can turn our attention to forging the best possible bloc on the best possible terms.

BONUS LINK: “China’s top electric-vehicle maker BYD Co. won’t announce a major plant investment in Mexico until at least after the US election,” reports Bloomberg. Clearly the future direction of U.S. policy will still matter a great deal.

BONUS BONUS LINK: Compass advisor Michael Pettis puts the question well: “In a world where globalization has led to the disruptive transfer of industrial policy from mercantilist economies to open economies, countries like Ireland and Singapore are playing a very active role in undermining the ability of the latter to regain control of their national economies. I guess the obvious question is whether this will be ignored, or will instead lead to even more aggressive protectionism that ultimately penalizes the very countries that play this role.”