#193 Who is Getting Shanghaied in Trade?

"The Christian Economist" with logo and a closeup of a dollar bill in the background

Trade with China makes Americans richer, but China is likely using the profits from their exports to build a military that the US will fight someday.


In the 19th century, if a sailor got too drunk in a port city, he might wake up the next day on a ship steaming toward Shanghai. The noun became a verb, and he had been “Shanghaied,” but in the current US-China trade relationship, who is getting Shanghaied?

Trade with China makes us richer, but they might be using those profits to build a military that we will fight someday. I’ve often said, you won’t find a one-armed economist because we will always say, “On the other hand.” Trade with China reflects this conflict. Trade makes us richer, but it also makes China richer. What do we do?

I think it would be difficult to find a scripture that encouraged market discrimination against a people group, just because they are from another country. That’s where Christianity and Economics support each other. They BOTH call for open markets and trade, among all people groups and all countries.


Trade is Good

Of course, trade is good. The entire Adam Smith economic legacy might be neatly tied up in a two-step process: First, increase production via specialization, then trade your surplus.

Trade is Good is one of the Ten Commandments of Economics that I found with my co-author Sergiy Saydometov, when we wrote the book titled Biblical Economic Policy.

If we didn’t trade, we would be very poor. I’m pretty good at giving economics lectures and writing, I’m an average farmer, a lousy tailor, and even a worse auto mechanic. I couldn’t make a car if my life depended on it. Instead, I specialize in writing and speaking, and I trade for food, clothes, and cars. That little economic system works at the national level too. This is still Adam Smith territory: he noticed that the French were better at making wine, but the Scots were better at making Whiskey. That’s why some wines, like Champagne and Bordeaux, are named for the region where they are made. I’ll presume you know why they call it “Scotch Whiskey.”

In the first nine months of this year, China exported to us $210 billion more in goods than we exported to them. That’s the FRONT part of the equation that they explain to you on CNN and Fox News. The back part of the equation is a little more complex, so you only find that in the Wall Street Journal and The Economist. That’s where you find this Chinese businessman holding a million US dollars and trying to exchange it for something. He ends up buying a shopping mall in Cincinnati, or a wheat farm in Kansas because that’s where the US dollar is honored. That back side of the equation is where you hear people complain “The Chinese will own the US someday.” That’s chicken little economics. I heard the same thing about the Japanese in the 1990’s. If the Chinese buy $210 billion worth of real estate in the US every year, there really is not even an ESTIMATE of how long it would take them to own a meaningful percentage of US assets. Recently, there have been reports that they are buying land near military installations. That’s concerning.


Trading Avoids War

There’s something called the Golden Arches theory of Conflict Prevention that goes something like this “No two countries that both have a McDonald’s have ever fought a war against each other.” It was first proposed by Thomas Friedman in a New York Times column, then became part of his book titled The Lexus and the Olive Tree, which I read years ago. Maybe it was disproven by the UK’s struggle with Argentina over the Falklands, and the current Russian war on Ukraine, but the concept is still valid. Trading avoids war.

Part of the reason that Imperial Japan attacked the US was because the US stopped trading oil and steel with them. OK, the US had good reason. They were responding to Japan’s atrocious treatment of the Chinese, just across the Japanese border. That’s interesting to think about: My podcast today, attempts to avoid war with China, and it was Japan’s mistreatment of THEM, that partially led to World War II.

You can also make the economic case, that part of Adolf Hitler’s popularity was due to his promise to re-ignite the Third Reich after the cruel treatment of Germany at the Versailles agreement. The great British economist Maynard Keynes left the conference in protest, arguing that it would cause World War II. He was right. The Versailles Agreement extracted severe financial payments from Germany. To make the payments, they simply printed up the Deutschmarks, and it caused hyperinflation. Hitler promised to get revenge on the rest of Europe.

Another example is the formation of the European Union. The original purpose was to avoid World War III. It began as a coal and steel trading agreement because coal and steel are two of the elements required to make the implements of war.


Beating Plowshares into Swords

You DID get the idea that it’s backward from the scripture in Isaiah 2:4, where we are called to “Beat our swords into plowshares.” That’s the problem. The conservative voices in America will warn you that when you buy a Chinese product, the profits are used to build a war machine that will be used to dominate the world. That IS something of a concern, but you’ve already heard about how we get richer by trading with China. So, if we stop trading, WE will become marginally poorer. Then, how will WE be able to afford to build a military to defend the world against China’s expansionist powers?

Ginger and I are blessed to be able to travel. We like exotic places, but we have purposely avoided Cuba because we’ve been told the money we would spend in the country would be used to further suppress the population, so we’re not going. That’s the same argument being made by the anti-China trade folks: They’re concerned that the Chinese government is using profits from US-China trade, to build a military.


The Market

To some extent, the market will take care of this. As Chinese products get more expensive, consumers will follow the demand rule of economics, and buy products from lower-cost producers. During a trip to Vietnam some years ago, one of my traveling buddies was charged with sourcing a men’s shirt, because costs in China were getting too high.

During a separate trip to China, we drove past a newly completed apartment complex. It was more than a complex; it was a small city. I counted the rows while one of my grad students counted the columns, and we estimated it would hold 10,000 people. It was totally empty, and my guess is that it remains empty today. That’s the problem with a centralized government. None of us is as smart as all of us, but Communist Socialism denies that very simple fact. They continue to barrel ahead with foolish projects that will harm the economy. For more on how the US might be taking us down the same foolish path, I will refer you to my podcast #76 Central Planning Still Does Not Work.

China’s opening up in the 1980s and its membership in the World Trade Organization in 2001 ignited a new phase of globalization, bringing investment to China and cheaper consumer goods to Western consumers. For years after that, foreign companies plowed the profits they made in China back into China. Now, as growth slows they are pulling those profits out. There are many indications that the market is decreasing China’s economic power.


The Solution

“A problem well-stated is half-solved.” That quote is attributed to Charles Kettering, the famed inventor and former head of research for General Motors. Well, this one is ONLY half-solved. You have to wonder if the talking heads on the conservative side really understand that what they are calling for is government control of the marketplace, to disallow consumers the freedom to choose the products they want.

If we were convinced of China’s expansionary desires, we would not trade with them. Until that’s absolutely clear, America should do what she’s so good at: Give people the freedom to choose. The US has the most powerful economic machine in the history of mankind. That’s been produced by freedom-loving people who demand choice in products and services.

Fear God
Tell the Truth
Earn a Profit