Abstract

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The election-driven diatribes about the US-China economic relationship are correct that there are serious problems but wrong about what the problems actually are. The most basic evidence shows trade deficits do not cause US unemployment. Neither does the dollar-yuan exchange rate.
China’s accession to the WTO did considerable harm to US manufacturing employment 15 years ago. The main problems now are that American comparative advantage is being blunted by China’s intense protection of state-owned enterprises and equally intense theft of intellectual property.
Diagnosing the wrong ills will lead to the wrong cures. The US should not try to balance the trade deficit or sanction China for having the wrong currency policy. Instead, the US should sanction Chinese firms that benefit from stolen intellectual property, postpone a bilateral investment treaty, and not grant market economy status until China becomes a much better partner.​