Do we want China to slow down or stop?

There’s an old joke about a man driving his car who rolls past a stop sign, not noticing a police car parked nearby. The officer in the squad car immediately responds with flashing blue lights. The driver obediently pulls over and begins pleading his case when confronted by the policeman. “Didn’t you see the stop sign?” the officer demands. “Officer,” he explains, “I did slow down.” The officer responds by producing his night stick and raining down blows on the non-compliant driver while asking, “now, do you want me to slow down or stop?”

The point is, slowing down and stopping are two very different terms, and should not be used interchangeably. The same could be said about free trade and fair trade. Way back in 2009 when I began my first campaign for Congress, I pointed out the difference between free trade and fair trade. I have been an ardent supporter of the latter, which is why I recognize the value of the policies currently being implemented by the administration to achieve fair trade deals – particularly with China.

While there has been much debate over the last year or so about the merit of tariffs as a tool to bring China into compliance, consider this. Since China’s accession into the WTO in 2001, they have flouted the rules of the trade organization and conducted themselves in a belligerent economic manner. Further, the WTO has been content to look the other way as China attempts to steamroll global trading partners – the U.S. among them – through forced technology transfers, intellectual property theft, currency manipulation, false data reporting and more — all while receiving the added benefit of being designated a “developing economy” by the WTO.

A case in point: soybeans. The casual observer might point to the implementation of tariffs as the precipitating factor in the sharp decline in soybean prices a year ago. In fact, one could argue that tariff action implemented by the administration had little to do with it. Not surprisingly, China itself is more likely the culprit.

As they are wont to do, China made a false supply and demand report – certainly not the first time they’ve done so (think cotton just a few years ago) – and U.S. soybean farmers and global markets responded predictably. A lower carryover stocks report resulted in a market uptick and a reported increase in Chinese demand prompted U.S. farmers to increase soybean acres. The markets hovered around $10.40 a bushel until such time as those reports were amended, leading to a roughly $2.00/bu. decline in soybean futures (pre-tariff mind you). The ensuing fallout resulted in a net positive to the Chinese of about $4/bu., realizing a cash savings of $2/bu. Their $2/bu. gain from a short position in the futures market was strategically taken prior to amending supply and demand estimates.

Adding insult to injury to U.S. farmers, local basis went haywire while the Board floundered and untimely rains at harvest led to widely reported poor soybean quality, resulting in high dockage at the elevator and in some cases refusal of delivery on 2018 soybeans.

2019 hasn’t shaped up much better for U.S. farmers at the outset – considering both terrible weather and global market conditions – but I do believe there is daylight on the horizon. At the time of this writing, it was reported that China had agreed to a purchase of over 500 thousand metric tonnes of U.S. soybeans teeing up the potential for an additional 14 million tonnes going forward – welcome news to American farmers.

Moreover, the tariffs implemented by the Trump administration appear to be driving a decline in foreign direct investment (FDI) in China, a critical component of their economy – i.e. a U.S. company building a manufacturing facility in China. The revenue generated from FDI is essential to China’s Belt and Road Initiative (BRI) – a modern day Silk Road – which Beijing believes will facilitate its march to global economic supremacy. What’s more, the BRI also serves China’s aggressive expeditionary goal of global military preeminence which certainly presents national security challenges to countries around the world.

FDI now appears to favor more attractive destinations in the Pacific rim – Vietnam, India, Malaysia, et al – increasing the likelihood that China will recognize the need to play by the rules for the long-term good of their own economy. The need to keep over a billion Chinese employed will also likely be a key consideration as Xi Xinping seeks to avoid a prolonged contracting economy and a potential challenge to his “president-for-life” status.

While many will likely continue to rail against President Trump’s “blunt instrument” of tariffs as misguided and/or excessive, it’s hard to argue with results. Americans need to take a page from the Chinese book and start to think strategically and much more long-term. And when it comes to their continued bad behavior in the global marketplace – IP theft, forced tech transfer, currency and market manipulation, global expansion and more – we should ask ourselves, do we want China to slow down, or stop?

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Editor’s note: U.S. Rep. Rick Crawford, R-Jonesboro, represents Arkansas’ First Congressional District. The opinions expressed are those of the author.