China’s transition from plan to market since 1978 has not only increased prosperity but also has led to a new way of thinking. In a 2005 poll covering 20 countries, GlobeScan found that China had the highest proportion of respondents (74 percent) who agree that the “free market economy is the best system on which to base the future of the world.” That outcome is remarkable given that only a short time ago Beijing embraced a state-led development model.

The same poll found that U.S. citizens have strong support for the free market (71 percent) while Russia, which has a long anti-capitalist history, still has rather weak support (43 percent favored the market), and France, with its long attachment to socialism, has even less support with only 36 percent saying they favor a free market.

The significant change in the Chinese people’s attitude toward economic liberalism is further illustrated in the Chicago Council on Global Affairs’ 2006 multination survey of public opinion. Eighty-seven percent of those surveyed in China thought that “globalization, especially the increasing connections of their country’s economy with others around the world, is mostly good for their country.” That result compares with 60 percent in the United States and 54 percent in India.

It is not surprising that the Chinese people would embrace globalization as it has opened China to the outside world, brought about rapid economic and social change, and helped lift millions out of absolute poverty. In 1978, only 12 large state-owned enterprises (SOEs) had the right to engage in foreign trade. Today virtually any firm is free to enter the import-export business. China has become the world’s third largest trading nation and is the leading destination for foreign direct investment. Those regions that have experienced the greatest amount of economic freedom have also grown the most and have the highest living standards. Guangdong, Zhejiang, and Fujian are all heavily “marketized” (SOEs account for only a small fraction of output) and have growth rates far above the national average.

In widening the range of opportunities open to people, globalization has increased personal freedom and put pressure on the Chinese Communist Party (CCP) and National People’s Congress to pass a Property Law last March. It recognizes the importance of the private sector and better protects property rights—all with a positive impact on civil society.

People are free to own their own homes, operate their own businesses, and seek work in the private sector. Those and other economic freedoms would have been impossible under central planning and autarky. One can now read a leading business magazine like Caijing and see a glossy photo of the Statue of Liberty on the same page as an advertisement for private condominiums in Beijing. F. A. Hayek’s Road to Serfdom and the Cato Institute’s Toward Liberty can be found in Beijing bookstores. High-school students in Shanghai can now open their new history textbooks and find much discussion of globalization and economic reform but only a single reference to Mao.

Most surprising, one can travel to the Southwestern University of Finance and Economics in Chengdu and see a life-size statue of Adam Smith, who in 1776 wrote in The Wealth of Nations: When “all systems either of preference or of restraint” are abolished, “the obvious and simple system of natural liberty establishes itself of its own accord.”

Spontaneous order, or economic harmony, arises out of voluntary exchange based on what Smith called the “laws of justice.” The role of market prices and profits is to coordinate the myriad individual plans in the pursuit of happiness.

Smith’s principle of spontaneous order—or freedom under the law—is similar to Lao Tzu’s principle of nonintervention (wu wei). Long before the Wealth of Nations was written, Lao Tzu argued that when the ruler takes “no action . . . the people themselves become prosperous.” Today China’s President Hu Jintao is promoting the idea of a “harmonious society” and “peaceful development.” In doing so, he should embrace the ideas of Lao Tzu and Adam Smith, and realize that limited government and the rule of law are essential for peace and harmony.

The problem is that the CCP has no desire to let go of its monopoly on power. Creating “free private markets,” as the late Milton Friedman recommended to General Secretary Zhao Ziyang when they met in 1989, would require widespread private property rights and further undermine the CCP’s influence. That is why China’s leaders continue to favor market socialism rather than market liberalism.

Nevertheless, the momentum for market liberalization is strong, especially since China joined the World Trade Organization in December 2001. Trade liberalization has been good for China and good for the global economy. Even though millions of Chinese workers have been dislocated, the Chicago Council survey found that 65 percent of those polled in China believe that “international trade is good for the job security of workers.” In contrast, only 30 percent of Americans surveyed thought free international trade benefited workers.

Of course, the goal of trade is not to protect jobs but to create wealth—and global wealth is much greater today than it was two or three decades ago. Trade liberalization, the information revolution, and financial integration have combined with pro-market institutional change to make China’s future bright. Trade is not a zero-sum game: the richer China becomes, the more prosperous the global economy. Protectionism would destroy the market forces that have helped lift millions out of poverty, embolden hardliners, and politicize economic life. Both economic and personal freedom would suffer.

One lesson from China’s transition from central planning to a market-oriented system is that poverty is best addressed by institutional change rather than foreign aid and government intervention. Several decades ago most of the world’s poor were concentrated in Asia, not Africa. The reverse is true today. Foreign aid has not improved the plight of the poor.

Likewise, increasing the minimum wage is not a panacea. Politicians promise a higher wage but do nothing to address the underlying causes of poverty. Rather, if the legal minimum wage is above the prevailing market wage for unskilled workers, employers will cut back on hours, reduce benefits, and switch to labor-saving methods of production.

Hong Kong has no minimum wage yet is prosperous. China has no national minimum wage and lets the market guide local minimum wages so that they do not interfere with economic growth and employment. In Shenzhen, one of the most marketized cities in China, the minimum wage was increased last year to 810 yuan per month (about $105). Many companies already pay more than the minimum, so the higher minimum wage is unlikely to interfere with job opportunities. Indeed, there is a labor shortage, so market wages will be forced up by competition. As one local labor official said, “We are adapting to the market through the pay raise, rather than interfering with the market.”

Entrepreneurship Everywhere

The spirit of entrepreneurship is evident everywhere in China. One of the most popular TV game shows is “Win in China,” a contest in which the person with the best business plan is awarded venture capital financing of $1.2 million and gets to retain 20 percent of the equity. The first show in 2006 attracted 120,000 entrants. The host of the show, Anna Wang Lifen, launched the program because she sees entrepreneurs as “the heroes of our peaceful times.”

Although China has made substantial progress on its march toward the market, much remains to be done. Free markets require widespread private property rights, a transparent and just legal system, and the free flow of information. Moreover, if China is to develop world-class capital markets, Beijing must make the yuan fully convertible and allow capital freedom.

The right to freely buy and sell currencies and assets is an important element of personal freedom. In his “Memorandum to General Secretary Zhao Ziyang,” Friedman listed what he considered the fundamental lessons from studying the process of development. The first lesson, which he thought applied to China as well as India, is that the government should “end exchange control, establish a free market in foreign exchange, and permit the exchange rate to be determined by the market.” Without such reforms, he thought, corruption would continue. Although Hong Kong does not have a freely floating exchange rate (it has a currency board that fixes the Hong Kong dollar to the U.S. dollar), there are no capital or exchange controls. The high degree of capital freedom has enabled Hong Kongto become a leading financial center.

China is moving gradually toward a more flexible exchange-rate regime and slowly relaxing capital controls. That process will take time, but it appears China’s leaders support the long-term goal of a fully convertible currency. Ending capital and exchange controls would give the Chinese people greater investment options and increase efficiency. But, again, such reforms would threaten the CCP’s power.

Opening the CCP to capitalists is not sufficient. The Party’s monopoly on power has to be contested at some point. Nor is it sufficient to amend the PRC Constitution to better protect private property when there is no independent judiciary to enforce contracts. If China’s future is to rest with the free market, there must be political as well as economic liberalization. Ultimately a free market cannot exist without a free people. The real challenge for Beijing will be to institute a rule of law that protects persons and property against the state. The people’s preferences will then rule rather than the Party’s. China’s leaders would do well to follow the path of Lao Tzu and Adam Smith by adhering to Hong Kong’s model of “Big Market, Small Government.”

An earlier version of this article appeared in Vital Speeches of the Day (November 15, 2005).

From a liberal perspective the goal of economic development is not simply to maximize output but, rather, to increase freedom of choice. As Peter (Lord) Bauer wrote in Economic Analysis and Policy in Underdeveloped Countries, “I regard the extension of the range of choice, that is, an increase in the range of effective alternatives open to people, as the principal objective and criterion of economic development.” Those countries that have liberalized trade—such as China and South Korea—have expanded individual choices and outperformed those that have clung to protectionism—such as Cuba and North Korea.

When considering how individuals and nations move from poverty to prosperity, one needs to emphasize that natural constraints (scarcity of resources) can be overcome if artificial constraints (such as trade restrictions) don’t impede development. This idea is consistent with Hong Kong Chief Executive Donald Tsang’s call for adherence to the principle of “small government, big market.”

There is a saying in China: “If no artificial constraints, then there is nothing you cannot do.” Nonintervention (wu wei) results in spontaneous order (zi fa) if government is limited to the protection of persons and property. In the fourth century B.C., long before Adam Smith, the great Chinese philosopher Lao Tzu held that when the ruler takes “no action,” “the people of themselves . . . become prosperous.”

Wu wei does not imply “the complete absence of all activity, but only of such as is forced, artificial, and unspontaneous,” according to Derk Bodde, the translator of Fung Yu-lan’s classic A History of Chinese Philosophy.

The Taoists saw a good government as one consistent with nonintervention so people could improve their welfare. Thus in the Chuang-tzu, we read: “Where knowledge and plans are not utilized, one must fall back upon the natural. This is perfect peace, the acme of good government.”

In the Han Fei Tzu (Han Fei was a legalist who died in 233 B.C.), one sees a clear understanding of the importance of free trade for creating harmony and prosperity:

When a man sells his services as a farm hand, the master will give him good food at the expense of his own family, and pay him money and cloth. This is not because he loves the farm hand, but he says, “In this way, his ploughing of the ground will go deeper and his sowing of seeds will be more active.” The farm hand, on the other hand, exerts all his strength and works busily at tilling and weeding. He exerts all his skill cultivating the fields. This is not because he loves his master, but he says: “In this way I shall have good soup, and money and cloth will come easily.” Thus he expends his strength as if between them there were a bond of love such as that of father and son. Yet their hearts are centered on utility, and they both harbor the idea of serving themselves. Therefore in the conduct of human affairs, if one has a mind to do benefit, it will be easy to remain harmonious, even with a native of Yüeh [a barbarian state]. But if one has a mind to do harm, even father and son will become separated and feel enmity toward one another.

This passage was written more than 2,000 years before The Wealth of Nations!

In 1987 China’s paramount leader and reformer Deng Xiaoping recognized the principle of spontaneous order when he said: “Our greatest success—and it is one we had by no means anticipated—has been the emergence of a large number of enterprises run by villages and townships. They were like a new force that just came into being spontaneously.”

Kate Xiao Zhou, in her 1996 book How the Farmers Changed China, describes the demise of China’s collective farms and the creation of the household-responsibility system (baochan daohu), with its township and village enterprises (TVEs), as “a spontaneous, unorganized, leaderless, nonideological, apolitical movement.”

China began to unilaterally liberalize foreign trade well before joining the World Trade Organization in December 2001. The first four special economic zones (SEZs) were created in 1980, and since then the coastal provinces (such as Guangdong, Zhejiang, and Fujian) have become highly “marketized.” The nonstate sector, including private firms, now overshadows the state sector.

Nicholas Lardy, a China specialist at the Institute for International Economics, has pointed out that in 1978 only 12 large state-owned enterprises (SOEs) were authorized to conduct foreign trade. However, by 2001 there were 35,000 domestic firms engaged in international trade, including private enterprises, and more than 150,000 foreign-funded enterprises. Today any registered firm can engage in foreign trade. Moreover, China reduced the average tariff rate from 55.6 percent in 1982 to 15.3 percent at the beginning of 2001. The average tariff on manufactured goods is now less than 9 percent. As a result of this dramatic liberalization, China is now one of the world’s most open economies.

China’s approach to development has been primarily “bottom-up,” or experimental. Typically, local leaders would permit reform on a trial basis and not penalize entrepreneurs who were experimenting on their own. When successful, politicians would take credit and let the experiment spread. At some point Beijing would sanction the reforms.

Piecemeal reform has led to numerous ownership forms, including cooperative shareholding, foreign-funded enterprises, private firms, and TVEs. Economists Gary Jefferson and Thomas Rawski call this process “induced privatization.” Under it the state sector has shrunk from a dominant position in 1978 to less than one-third of industrial output value today.

Property Far from Secure

By letting the nonstate sector grow, China has avoided the difficult political decision of outright privatization of large SOEs. Private firms were not legal until 1988, and in 2004 the PRC constitution was amended to give greater protection to the growing private sector. Private property rights, however, are still far from secure, and corruption is rampant. So while economic liberalization has progressed, and China has become the world’s third-largest trading nation, the Chinese Communist Party (CCP) retains its monopoly on power.

Nevertheless, China’s opening to the outside world has increased personal freedom and prosperity, and has led to a demand for safeguarding private property rights. Jianying Zha, in her fascinating book China Pop, writes, “The economic reforms have created new opportunities, new dreams, and to some extent, a new atmosphere and new mindsets. . . . There is a growing sense of increased space for personal freedom.”

Kathy Chen of the Wall Street Journal notes that the development model adopted by the newly emerging urban centers, such as Shishi in Fujian, is “small government, big society” (xiao zhen fu, da she hui).

When the National People’s Congress amended the constitution to make “legally acquired private property inviolable,” that was a clear signal the market was here to stay—and a far cry from Mao Zedong’s admonition to “strike hard against the slightest sign of private ownership.”  

There is no doubt that globalization and the information revolution have increased personal freedom in China. More than 100 million Chinese have access to the Internet. 

And I am sure that computer whiz-kids will stay one step ahead of government censors. Moreover, if Shanghai is to become a world-class financial center, there will have to be a freer flow of information and open capital markets.

President Hu Jintao has recently indicated his adherence to a policy of “peaceful development,” which is precisely the policy that China has been following since 1978. The United States would be wise to continue a policy of engagement and avoid destructive protectionism. Foreign-funded enterprises and private firms account for more than 60 percent of China’s foreign-trade sector. U.S. protectionism would harm the very sector that is working to decrease poverty, increase exposure to the West, and pressure the CCP to accept change.  

Institutional reform (especially trade liberalization) has substantially reduced poverty in China—real per capita income has increased nearly fivefold since 1978, with significantly larger increases in the highly marketized coastal areas. But there has been little increase in political freedom. Further economic liberalization—especially privatization of large SOEs and capital freedom—is constrained by political issues. Whether reformers in the CCP will gain the upper hand remains to be seen.

An array of government interventions continues to restrict economic and personal freedom, and, hence, China’s future development. Artificial constraints include capital and exchange controls, state-owned banks and enterprises, interest-rate controls, and especially the lack of a transparent legal structure that protects persons and property.

“Free Private Markets”

In 1988, at the Cato Institute’s historic conference in Shanghai, Milton Friedman called for China to abandon its socialist market economy and make the transition to a full-fledged system of “free private markets.” Progress has been made since that time, as markets not planners determine most prices. There is private housing and private enterprise, but China is still plagued by widespread state ownership and control, especially in the financial sector. Without capital freedom, investment alternatives will be limited and investment decisions will continue to be politicized.

Privatization is the only way to rid the system of corruption. But as long as the CCP gains from the present socialist market system, change will proceed slowly, if at all. Economic reform eventually will require political reform. The question is whether the gradual increase in economic freedom will be sufficient to bring about political change that supports, rather than retards, further liberalization.

We should not forget that trade expands choice and, therefore, should be promoted as a fundamental human right. U.S. protectionism would be self-defeating and strengthen Chinese nationalism and anti-American sentiments. Engagement is the only rational policy to promote peace and prosperity.

Writing in the New York Times just before the talks collapsed, author Michael Lind acknowledged that farm subsidies in advanced nations exploit their own consumers and taxpayers (“The Cancún Delusion,” September 12). However, he discounted their harmful effects on farmers and economic development in poor nations.

Yet farm subsidies in rich countries depress market prices for farm products and induce poor countries in Africa and elsewhere to import food that local farmers could otherwise produce more efficiently. Farmers in poor countries are rightly concerned about the effects of the subsidies.

Consider cotton. The United States spends some $2.5 billion a year and the European Union about $700 million in subsidies to cotton farmers. The historically low cotton prices are wreaking havoc for domestic producers in poor countries.¹ Cotton subsidies in Mississippi drive cotton farmers in West Africa out of business. African countries pleaded unsuccessfully with the WTO to end all cotton subsidies, but they are only the tip of the agricultural-subsidy iceberg.

U.S. farmers annually receive more than $20 billion from the government, and EU subsidies are even larger—45 billion euros a year.² These payments for beef, cotton, wheat, and other products spur production, depress product prices on world markets, and make it more difficult for farmers in developing countries to compete. American farmers produce twice as much wheat as the country uses, but federal subsidies help protect them from world market-price signals. Washington then uses food aid and other export programs as a safety valve to cope with overproduction.

Both the EU and the United States maintain programs to directly subsidize exports of farm products. The EU spends about $3.3 billion per year doing this. That gives EU goods an artificial advantage in international markets and works against the interests of producers in poor countries.³

Direct export subsidies have long been a prominent feature of U.S. farm programs. Public Law 480, enacted in 1954, is still going strong. It was instituted to rid government warehouses of surplus wheat, corn, cotton, and other farm products acquired through price-support programs. Dubbed “Food for Peace” to burnish its desired altruistic image, PL 480 provides easy credit and donates food to people throughout the world in response to famine and other emergencies.

Farmers in poor nations are especially critical of U.S. food aid for humanitarian purposes. Unlike the EU, which for the most part donates cash to buy food from producers in stricken countries, the United States buys food from American farmers. The Department of Agriculture (USDA) estimates the total value of U.S. food aid to be about $1.5 billion this year.⁴

Law Changes

The nature of U.S. food-aid programs has changed as the nature of farm subsidies has changed. In 1996 Washington stopped storing cotton, grain, and other products as a way to support farm prices and raise farmer incomes. Though food aid is no longer an adjunct of price-support programs, it continues as Washington buys the crops directly from the U.S. market.

The operation of U.S. food-aid programs demonstrates the difficulty of linking them to farm policy. Local farmers in Ethiopia, for example, see commodities purchased from American farmers—some $500 million this year—arriving as humanitarian aid as tons of their wheat, sorghum, and beans remain unsold in Ethiopian warehouses.⁵ U.S. food aid not only breeds a welfare mentality in the recipients (just as domestic welfare programs do), like all other first-world farm subsidies, it also works against the interests of third-world farmers.

Food-aid programs have been augmented over the years by a variety of other dumping schemes. Washington now provides U.S. exporters guarantees against default on loans used to purchase U.S. agricultural commodities, reimbursement of trade groups and private companies for promotional activities overseas, and subsidies for exports of dairy products and other farm commodities. Recipients of export subsidies include Sunkist Growers, Dole Foods, and Gallo Wines. The value of all direct export subsidies—by USDA estimate—will exceed $6 billion this year.⁶

Indirect subsidies in wealthy countries also damage producers in low-income countries. The U.S. sugar program, for example, holds domestic sugar prices above the world price through import quotas. It also reduces opportunities for sugar producers in low-income countries. Indirect export subsidies are just as harmful to producers in low-income countries as the direct subsidies associated with the production of beef, corn, cotton, rice, wheat, and other commodities in first-world countries.

Farmers in the United States become irate when low-cost imports undercut domestic prices. Farmers in low-income countries are just as concerned about the effects of subsidized agricultural imports on their markets. It is ironic that one arm of the U.S. government provides assistance for economic development in poor countries while another subsidizes farm exports that stifle development.

The developing countries did not go to Cancún with clean hands—they have higher trade barriers overall than richer countries, but their agricultural protection generally is lower. (Poor countries often keep food prices artificially low and tax agricultural exports at high rates.) Ending first-world farm subsidies, as Lind suggests, would greatly benefit consumers and taxpayers in rich countries. However, ending policies that distort world trade in agricultural products—contra Lind—also is critical to poor countries.

E. C. Pasour, Jr.

Professor Emeritus

Department of Agricultural and Resource Economics

North Carolina State University

Notes

1. Neil King, Jr., and Scott Miller, “Disputes Between Rich and Poor Kill Trade Talks,” Wall Street Journal, September 15, 2003, p. A18.
2. Roger Thurow and Scott Kilman, “As U.S. Food-Aid Enriches Farmers, Poor Nations Cry Foul,” Wall Street Journal, September 11, 2003, pp. A1 & A8, “Cancún’s Silver Lining,” Wall Street Journal, September 16, 2003, p. A16. Under the 2002 farm bill, part of the subsidy to U.S. farmers is partially “decoupled” from current production. If fully decoupled, the subsidy would remain the same, regardless of the amount of the product produced and would not spur production.
3. King and Miller.
4. See export subsidy data for fiscal years 2002–2004 for the USDA’s Foreign Agricultural Service at www.usda.gov/budget/.
5. Thurow and Kilman, p. A8.
6. See www.usda.gov/budget/.

The best way to promote human rights around the world is to promote free trade. Trade liberalization improves ties among nations, increases their wealth, and advances civil society. Protectionism does the opposite. Governments everywhere need to get out of the business of trade and leave markets alone. Western democratic governments, in particular, need to practice the principles of freedom they preach and think of free trade not as a privilege but as a fundamental human right.

A free-market approach to human rights policy does not mean an attitude of indifference toward human rights abuses. Using slave labor or political prisoners and compelling very young children to compete in international markets are wrong. But blanket restrictions, such as the denial of most-favored-nation (MFN) trading status or the use of sanctions not directly targeting the wrongdoers, should be avoided. The problem is that even limited actions are very difficult to enforce and unlikely to bring about political change in an authoritarian regime.

Protectionist measures are more apt to radicalize than liberalize closed societies. The logical alternative is to use the leverage of trade to open authoritarian regimes to market forces and let the rule of law and democratic values evolve spontaneously as they have in Chile, South Korea, and Taiwan. The expansion of markets creates a culture of commerce and economic liberty that naturally spills over to social and political life. As people become freer in their economic life, they will demand greater autonomy in other areas, including a stronger voice in government.

Free Trade as a Human Right

The proper function of government is to cultivate a framework for freedom by protecting life, liberty, and property, including freedom of contract (which includes free international trade), not to use the power of government to undermine one freedom in an attempt to secure others. The right to trade is an integral part of an individual’s property rights and a civil right that governments should protect as a universal human right.

Market exchange rests on private property, which is a natural right. As moral agents, individuals necessarily claim the right to liberty and property in order to live and to pursue their interests in a responsible manner. Governments should afford the same protection to economic liberties, including free international trade, as to other liberties.

Restrictive trade practices impede not only the flow of goods and services but also the exchange of information and the transmission of values that occur with free markets. When market exchange opportunities are curtailed, government power grows, with adverse effects on human liberty. Likewise, when markets expand, individuals gain autonomy and government power diminishes. People become less dependent on the state and more dependent on one another when markets open and protectionism declines. A case in point is China.

The Chinese Experience

Before China’s open-door policy, initiated in 1978, the Chinese Communist Party (CCP) had a monopoly on economic, social, and political life. China isolated itself from the West, and the Chinese people had little opportunity to expand their horizons. The repressive system of communal farming prevented China’s large rural population from determining its own fate, and state enterprises made the urban population totally dependent on government. The lack of an alternative to the centrally planned economy made China a giant serfdom where individuals had little hope of improving themselves and their families.

After 1978, China’s economic reforms—which liberalized trade, ended collectivized farming, and created new employment opportunities outside the state sector—freed millions of people from the iron grip of the CCP. The return of farming to families under the household responsibility system (baochan daohu) changed the whole dynamic of economic, social, and political life. The state was no longer the master for the 80 percent of China’s population that lived in rural areas. Farmers became risk-takers, created new markets, developed rural industries, and migrated to urban areas. They and their families were no longer slaves to the state: they resisted coercion and initiated what Kate Xiao Zhou calls a spontaneous, unorganized, leaderless, nonideological, apolitical movement that transformed the old communist system and enhanced human rights.^[1]

The quiet revolution that has been taking place in China’s economy since 1978 is combining with the information revolution to strengthen the fabric of civil society, especially in China’s southern coastal provinces. Commenting on China’s cultural transformation, Jianying Zha writes in her book China Pop, The economic reforms have created new opportunities, new dreams, and to some extent, a new atmosphere and new mindsets. The old control system has weakened in many areas, especially in the spheres of economy and lifestyle. There is a growing sense of increased space for personal freedom.^[2] Anyone who has visited China and seen the vibrancy of the market, the dynamism of the people, and the rapid growth of the nonstate sector will concur with Zha’s cautious optimism.

Commercial life in China is evolving naturally as people flee the countryside for improved living conditions and the chance to strike it rich in the growing nonstate sector.^[3] If this current growth continues, by the year 2000 nonstate enterprises will account for more than two-thirds of China’s industrial output and as much as 40 percent of China’s gross domestic product.^[4]

The liberalization and decentralization of economic life in China has widened the scope for civil society. Princeton University professor Minxin Pei believes that the gradual development of China’s legal system toward affording greater protection for persons and property, the growing independence and educational levels of members of the National People’s Congress, and the recent experiments with self-government at the grassroots level will help move China toward a more open and democratic society. He points to the upward mobility of ordinary people, occasioned by the deepening of economic reform, and to the positive impact of trade liberalization on political norms. In his view public opinion and knowledge of Western liberal traditions, such as the rule of law, have set implicit limits on the state’s use of power and have promoted the democratization of the legal system. There has been a sharp rise in the number of civil lawsuits against the state, and individuals are winning about one-fifth of their cases, according to Pei.^[5]

Of course, as long as the CCP stands in the way of private property and the rule of law, China will continue to experience corruption, and the future of freedom and civil society will remain precarious. But isolating China, by the use of trade sanctions or by denying China MFN trading status, would only make matters worse and slow political change. Trade has a civilizing influence, and that influence is more likely to change China than foreign intervention and protectionism.

The Civilizing Influence of Trade

Commerce brings people together, not only to trade goods but also to exchange information. Trade liberalization helps to depoliticize economic life, widen human experience, and reduce the threat of war. Peace and free enterprise tend to reinforce each other. When countries restrict foreign trade, they reduce wealth, diminish freedom, and increase the likelihood of conflict. They also block the natural formation of civil society, which is fostered by the growth of commerce. Traders find it in their own self-interest to treat their customers with respect. Good manners and good business go hand in hand; commercial society and civil society are inseparable. Trade also fosters the rule of law as people find it useful to accept common rules, respect one another’s rights, and be generally tolerant.

In The Wealth of Nations (1776), Adam Smith described how the development of commercial life in Europe gradually introduced order and good government, and with them, the liberty and security of individuals.^[6] Likewise, the English liberal Richard Cobden wrote in his 1835 pamphlet England, Ireland, and America, Commerce is the grand panacea, which, like a beneficent medical discovery, will serve to inoculate with the healthy and saving taste for civilisation all the nations of the world. According to Cobden, not a merchant visits our seats of manufacturing industry, but he returns to his own country the missionary of freedom, peace, and good government.^[7]

Harvard economist Robert Barro’s recent empirical work, summarized in Getting It Right, shows that earlier writers were correct in seeing a close relationship between free trade and free people. Barro finds that improvements in the standard of living . . . substantially raise the probability that political institutions will become more democratic over time. He argues:

The advanced Western countries would contribute more to the welfare of poor nations by exporting their economic systems, notably property rights and free markets, rather than their political systems, which typically developed after reasonable standards of living had been attained. If economic freedom can be established in a poor country, then growth would be encouraged, and the country would tend eventually to become more democratic on its own.^[8]

Conclusion

Trade policy and human rights policy should not be yoked. Imposing punitive tariffs on China by removing MFN trading status or using other restrictive practices to sanction China for human rights violations will do more harm than good. As Kate Zhou has shown in the case of China, commercial activity is liberating and a major way out of governmental control.^[9] We should not lose sight of that lesson in the pursuit of some feel-good policy that has little chance of changing China’s political climate but will devastate its blossoming market sector. Keeping people in China and elsewhere in poverty by restricting their human right to trade is neither ethical nor logical.

What China needs is a new system and a new way of thinking. The full range of human rights will come to China only when property rights are treated as fundamental civil rights and when civil rights are protected by the rule of law. As Harry Wu, a former political prisoner in China, put it, “Until private ownership is allowed on a wide scale, genuine liberalization—representative government, free markets and individual rights—will remain elusive in China.”^[10]

2. Jianying Zha, China Pop (New York: The New Press, 1995), p. 202.

3. The nonstate sector consists of all enterprises not directly controlled by the central government or by provincial governments. Nonstate enterprises include urban and rural collectives (of which township and village enterprises are particularly important), individually owned enterprises, foreign-owned enterprises, and joint ventures. Unlike state-owned enterprises, collectives face a hard budget constraint and are primarily market driven. See Michael W. Bell, Hoe E. Khor, and Kalpana Kochhar, China at the Threshold of a Market Economy, Occasional Paper 107 (Washington, D.C.: International Monetary Fund, 1993), p. 13.

4. Ibid.

5. Minxin Pei, Economic Reform and Civic Freedom in China, Economic Reform Today, No. 4 (1994), p. 12.

6. Adam Smith, The Wealth of Nations, edited by Edwin Cannan (New York: The Modern Library, 1937), p. 385.

7. Richard Cobden, Commerce Is the Grand Panacea, in David Boaz (ed.), The Libertarian Reader (New York: The Free Press, 1997), pp. 320-21.

8. Robert J. Barro, Getting It Right: Markets and Choices in a Free Society (Cambridge, Mass.: The MIT Press, 1996), p. 11.

9. Zhou, p. 100.

10. Harry Wu, A Chinese Word to Remember: ‘Laogai’, Washington Post, May 26, 1996, p. C7.

“Restrictive trade practices impede not only the flow of goods and services but also the exchange of information and the transmission of values that occur with free markets. When market exchange opportunities are curtailed, government power grows, with adverse effects on human liberty.”

“The full range of human rights will come to China only when property rights are treated as fundamental civil rights and when civil rights are protected by the rule of law.”