China's not breaking the rules. It's playing a different game.

In their Oval Office meeting earlier this week, President Obama predictably warned China's visiting president-in-waiting Xi Jinping that China must play by the rules in international trade. It sounded right and fair and slightly tough as it was carefully crafted to do by top White House political advisers, and the president may even believe it. But he shouldn't have said it.

Put aside for the moment the indelicacy of implicitly calling the soon to be president of the a country that is the world's second most powerful and that highly values "face" (pride,dignity) a cheater. I mean, can you imagine the reaction here if Xi had lectured Obama on playing by the rules? But I digress.

There are three problems. The phrase "all must play by the same rules" implies that all are playing the same game, but in actuality they are not. In many instances there are no rules or the rules are vague, untested, and unclear. Even where there are rules, many countries have been ignoring them for a long time and there is thus strong precedent for not playing by the rules or even for interpreting the rules such that they are actually said to bless the apparent violations.   

I have said before this before and I must emphasize it again. The fundamental premise of all U.S trade/globalization talks and discussions is that the participants are all playing the same game of liberal, neo-classical, free market, resource endowment and comparative advantage based free trade. This is a totally false premise that immediately gets the discussions off in irrelevant directions. The global economy is, in fact, sharply divided between those who are playing the free trade game and those who are playing some form of mercantilism. Of course, there is a spectrum of attitudes and policies, but roughly speaking the Anglo/American countries, North America, and parts of Europe are playing free trade. Most of Asia, much of South America, the Middle East, Germany and parts of Europe are playing neo-mercantilism. It's like watching tennis players trying to play a game with football players. It doesn't work, and insisting on playing by the rules doesn't help, because both sets of teams are playing by the rules -- of their game. 

In any case, there are a lot fewer clear cut rules than most people think. For example, probably the biggest single factor in the off-shoring of large chunks of U.S. based production and millions of jobs abroad has been the packages of financial investment incentives offered by China and others to global companies to encourage them to relocate production. More jobs have been lost to these packages than to currency manipulation. But you can't complain about rules violations because there are no rules to cover these investment incentives. At the federal level, American doesn't offer such incentives but there is not WTO or IMF or other rule against it. Nor is the United States proposing any rules in this area.

Take the case of currency manipulation. China is surely manipulating its currency, but so have and do many other countries. Japan, South Korea, Taiwan, Singapore, and others all used currency manipulation is a major element of their export led miracle growth strategies. Some of these countries still to engage in currency manipulation and recently others such as Brazil and Switzerland have gotten into the game. Germany enjoys an undervalued currency because of its incorporation in the Euro. So here is a case where rule violation has been so prevalent that the violation is, in a way, the rule. So if something is to be done about it, that something will have to be a lot more powerful than a call for everyone to "play by the same rules."

We first need to get everyone playing the same game, and that is more likely to turn out to be football than tennis.