Senate Finance Trade Subcommittee Hearing: Censorship and Trade
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 afellow at the Open Markets Institute. Ihave 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 andMeans Committee. All of these experiences inform my testimony today.
In 1989, Francis Fukuyama publishedan influential article called “The End of History?” He argued that the imminent dissolution ofthe Soviet Union reflected the triumph of economic and political liberalism – andthat economic liberalism would pave the way for political liberalism globally. This view permeated the zeitgeist when we designedthe WTO, and when we let China into it.
Developments in China have shatteredthat theory. Rather than democratizing as a result of its integration into theglobal economy, the Chinese Communist Party has weaponized that integration,using its economic leverage to quash the rights of foreign citizens in their homecountries. 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 salientideological threat to democracy.
When we look at the actual rules ofglobalization, we see how this came to pass. In designing the rules in the 1990s, we focused on liberalizing capitalflows, believing that a laissez-faire model would produce ideal economic andpolitical outcomes. We did not guard against a government that would exploitthat system with a fundamentally anticompetitive, zero-sum strategy. It is thatanticompetitive strategy – not natural comparative advantage -- that has led us to be economicallydependent on an authoritarian regime.
It’s wrong to say we couldn’t haveseen this coming. The founders of the multilateral trading system foretold thisoutcome -- and sought to prevent it. Theydesigned a regime grounded in fair competition. Cheating through currencymanipulation, labor rights suppression, or monopolistic behavior wasprohibited.
They presciently warned that withoutthese rules, state trading governments – uber-monopolists -- would destroy freeenterprise – and democracy.
These rules were memorialized in theHavana Charter, signed in 1948 by over50 countries. But it never entered into force.
It’s popular lore that anisolationist Congress rejected it. But that’s not accurate. The Charter failedbecause the American business community rejected it.
We managed to forestall the immediatethreat to democracy and free enterprise by keeping the Soviet Union out of theGATT. 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’sability to interfere in our civil liberties requires us to reduce its economicleverage over us. I offer fiverecommendations.
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 sincethe 1970s, the United States is having a conversation about strategicindustrial policy. We need to identifycritical sectors, map out supply chains, and ensure we have diverse sources notjust 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 ofsustaining supply chain diversification: We must keep an open mind abouttariffs. Tariffs can be a useful toolfor driving behavior. The United Stateshas the lowest bound rate at the WTO; that low rate, coupled withanticompetitive CCP behavior, has made it particularly lucrative to offshoreAmerican production and export it back. Until we have achieved global reform, we must consider tariffs to be oneway 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.