Sooner or later, reality makes itself felt. With President Richard Nixon’s Opening to China in 1972, the death of Mao, his successor Deng Xiaoping’s call for “all to get rich,” and the collapse of the Soviet Union in 1991, leaders of the free trading democracies eagerly adopted Professor Frank Fukuyama’s view that the world had arrived at “The End of History”- the title of his best-selling 1992 book.

The top executives of corporations ranging from Starbucks to Apple to Walmart to General Electric rushed to establish themselves to sell and produce in China while exporting from China. Deng Xiaoping said, “to get rich is glorious,” and the world’s big multinational corporations took him at his word and so did the major political leaders of the world’s democracies.

Bill Clinton had campaigned for the Presidency under the slogan of “no dictators from Baghdad to Beijing.” But as President, he adopted a policy of “positive engagement.” His U.S. Trade Representative, Charlene Barshefsky, emphasized that “you always engage,” meaning that the United States should never ignore an opportunity to make a new “free or what appeared to be a freer” trade and/or investment agreement. In 1997 Beijing erected what has become known as the “Great Firewall,” cutting the Chinese internet off from the Worldwide Web; Clinton laughed and said: “it will be like trying to nail Jell-O to the wall.” President George W. Bush insisted that free trade automatically sews the seeds of democracy wherever it goes while he agreed to induct China, despite its lack of a rule of law, a large number of state-owned enterprises, and continued five-year plans into the World Trade Organization (WTO). His Trade Representative, Robert Zoellick, intoned that “we want China to be a responsible stakeholder in the global, liberal, rules-based order.” President Obama had no reaction to China’s 2015 adoption of its Made in China 2025 policy for a wide variety of advanced technology products and services. Indeed, one wonders if Obama was aware of it, so convinced was the U.S. economics and foreign policy elite that China could do nothing but evolve into a quasi-democratic political system pursuing free market and free trade economic policies.

The vast majority of professional economists cheered all this on because they believed the law of comparative advantage was at work with the U.S. and China, each producing what they did best; at least cost and trading for the rest. To be sure, the U.S. trade deficit with China and overall soared, but that did not bother economists because the U.S. appeared to be at full employment, and the rest of the world was more than happy to fund the U.S. trade deficit by buying U.S. Treasury notes and other U.S. assets. Of course, a lot of American workers lost high-wage jobs as manufacturing left the United States for China, but economists comforted themselves with the faith that the workers could find other jobs in a full employment economy and, most importantly for the economists, inflation would remain extremely low – held down by low wages in China where the imports were being made.

It was truly a wonderful world. Global corporations were making gobs of money, China was moving toward capitalism and democracy, there was no more Soviet Union, global inflation was low to non-existent, global warming was known, but all countries promised to get it under control, and employment was full. To be sure, manufacturing operations in the United States were closing like tepees in a hurricane and laying off highly paid workers, but economists insisted the workers would all quickly find new jobs at similar pay and urged no worry. Defense spending declined dramatically around the world, with the exception of China, but that could be understood because its military was old and antiquated by any standards.

Of course, it has turned out to be a fairy tale that could not last because it was based on false assumptions and hopes rather than reality. The first and most important false assumption was that China had forsaken Marxism/Leninism for free markets, which would inevitably lead to free politics. America’s China watchers, blinded by their own hopes for China, have served our nation badly by encouraging the belief in China’s long-term market and political liberalization when the nature of its Leninist political system always militated against that.

So, have our economists gotten it wrong? Not only is their comparative advantage theory based on highly artificial assumptions (eternal full employment, no costs for starting up or shutting down a business, fixed exchange rates, and more), but they have completely ignored two enormous costs.

First, is the cost of risk. The creation of long, complex, global supply chains inevitably resulted in more risk of breakdown than in the case of domestic supply chains. That risk of breakdown or the prohibition of the use of a supply chain for reasons of national security was immensely increased by the inclusion of a country (China) under the rule of doctrines inimical to democracies as a key link in the chain. Yet, amazingly, neither the gnomes of Wall Street nor the contenders for Nobel prizes in economics ever counted the cost of risk. It was not included in the econometric models or the reports of the major think tanks.

A second uncounted cost was that of greenhouse gases and climate change. From 1991 to 2020, an enormous amount of industrial production was moved by global corporations from the United States and Europe to China. Of course, China’s labor was much cheaper than that of the economically developed world, and the absence of labor unions and environmental regulations combined to make China apparently the low-cost producer of a multitude of goods; but China’s energy is fired mostly by coal. The shipping of raw materials to China and the products it exports to the world results in emissions that account for ten to fifteen percent of annual global greenhouse gas emissions. The resulting global warming is proving to be very expensive. Yet, no one included any of these costs in the profit and loss calculations of the global corporations or the nations involved.

There is also a third cost. If nation One is hostile to nation Two or becomes hostile, it would be foolish for nation Two to help arm and advance the technological power of nation One. Yet that is exactly what has been happening between China and the world’s democratic countries. The costs of being “coupled” with China can be truly immense.

Some analysts bemoan the cost of “de-coupling” from China, but when all the costs are counted, those continuing to operate in China are likely to be far higher than those regrouping in less risky venues or even returning to America, which is still, overall, the biggest market.

BLOG DISCLOSURE: This website blog is published and provided for informational and entertainment purposes only.  The information in the blog constitutes the content creator or guest blogger’s own and it should not be regarded as a description of services provided by Sowell Management. The opinions expressed in the blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry.  The views reflected in the commentary are subject to change at any time without notice.

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