CHINA WATCHWhen Global Trade Is About More Than Money
International trade can yield far more than imports and exports. Economist’s new tool looks at how China is more effective than U.S. in exerting political power through import, export controls
International trade can yield far more than imports and exports. According to David Y. Yang, Yvonne P. L. Lui Professor of Economics, trade can be used to wield political power.
Yang watched as China imposed trade restrictions on competitor Taiwan following a 2022 visit to the island by U.S. Speaker of the House Nancy Pelosi. A decade earlier, the arrest of a Chinese fishing boat captain in contested waters culminated with Beijing blocking exports to Japan of certain rare earth minerals, critical components for wind turbines and electric vehicles.
“Another example is China banning the import of Norwegian salmon for nearly a decade as punishment for awarding a Nobel Prize to the dissident Liu Xiaobo,” said Yang, a political economist with expertise in the East Asian superpower.
His latest working paper, co-authored with Princeton’s Ernest Liu, presents a framework for measuring how much geopolitical muscle a country can flex by threatening trade disruptions. Today, the economists find, China exerts outsized influence over trading partners while the United States has less power than expected relative to the size of its economy
“With the arrival of new data sources and empirical tools, this is something we can now study very rigorously,” Yang emphasized. “Conducting these objective, data-driven analyses feels all the more urgent in today’s global geopolitical climate.”
Their model specifically tests a set of predictions made by mid-20th-century Harvard professor Albert O. Hirschman, a German-born Jew who fled Europe during World War II. His book “National Power and the Structure of Foreign Trade” (1945) offered a theoretical account of how countries might use trade to assert geopolitical dominance.
“Hirschman viewed the issue through a positive lens,” Yang noted. “Rather than bombing each other, countries could just fight economic wars to achieve the same goals.”
Hirschman saw that trade asymmetries could be exploited. But deficits and surpluses weren’t the only relevant variables. Also important was how crucial and easily replaced the goods in question were. Halting the flow of crude oil tends to pack a far bigger punch than withholding textile exports.
“If one country becomes overly reliant on another, it might be economically efficient,” Yang explained. “But it can leave the first country vulnerable by exposing it to unfavorable power dynamics.”
Hirschman’s ideas seemed less relevant in the post-war years, with the widespread desire for increased free trade. But the book feels fresh again today, said Yang, who recently assigned it in an undergraduate economics course.
