What Congress needs to be told is that free trade is mutually beneficial--consumers gain regardless of why imports are cheap--and that the purpose of trade is not to create jobs but to create wealth.

All the protectionist hyperbole diverts attention from the significant progress China has made in its transition from a planned to a market system. The increase in economic and personal freedom is evident to anyone who has witnessed the dramatic transformation of the coastal regions since 1978.

The simple truth is that no one is forced to trade with China. As China's Minister of Commerce Bo Xilai noted in responding to U.S. protectionist threats, "If they [American firms] could not make money by doing business with China, they would not have been doing it." The U.S. policy of engagement has worked relatively well, as has China's policy of "peaceful development." It will take time for China to meet all its WTO obligations. Much progress has been made on market access and rules-based issues, but much remains to be done on enforcing intellectual property rights. If China had not unilaterally liberalized its state-controlled trading regime since 1978, both China and the global economy would surely be much worse off today.

Likewise, if the United States is overly zealous in restricting the importation of Chinese goods, the long-run impact will be to lower the growth of U.S. exports to China and reduce the wealth of both nations. Trade is too often seen as a zero-sum game--one party wins; the other loses--with the prize being a trade surplus. That mercantilist attitude, which David Hume in 1758 called "a narrow and malignant opinion," accounts for a large amount of the China-bashing going on in Washington today.

When Congress focuses on third parties who may have been harmed by trade rather than on consumers and producers who benefit, Congress commits the same fallacy of composition that Hume exposed. Moreover, by failing to recognize the widespread benefits of trade for all nations, protectionists have lost sight of the liberal idea best expressed by Hume that "where an open communication is preserved among nations, it is impossible but the domestic industry of every one must receive an increase from the improvements of the others."

Moving toward a flexible exchange rate and capital freedom, however, will take time--but with an election coming up, Congress has little patience for "open communication" or Strategic Economic Dialogue. The lack of any significant results from the latest Strategic Economic Dialogue (SEDII) in Washington means that Congress will move forward with more than a dozen bills aimed at China's so-called unfair trade practices.

No wonder Chinese Vice Premier Wu Yi stated, "Attempts to politicize trade issues should be resisted." She recognizes that voluntary exchanges are win-win deals for the parties involved and that U.S. consumers have gained significantly from access to cheap Chinese goods, saving more than $600 billion since 1997. More importantly, China's trade liberalization has created a new mindset. In a recent poll of 18 countries, the Chicago Council on Global Affairs found that 87 percent of the Chinese respondents (the highest proportion in the survey) thought, "Globalization…is mostly good." That positive attitude toward international trade contrasts sharply with Russia (41 percent) and India (54 percent).

Yet Congress tends to ignore the growth of market liberalism in China, preferring to focus on the narrow issues of the exchange rate and the bilateral trade deficit. Because of the lack of any significant progress on the currency issue at SEDII, there is now a high likelihood that Congress will unilaterally act to apply countervailing duties (CVDs) to non-market economies (NMEs), specifically China, and treat the undervalued yuan as an actionable subsidy. Such legislation would violate the spirit of the WTO, harm U.S. consumers and endanger U.S.-China relations.

In addition to applying CVDs to NMEs, the Non-market Economy Trade Remedy Act of 2007 would further politicize trade by shifting the decision regarding China's NME status from the Department of Commerce to Congress.

To treat China as a NME for anti-dumping cases and at the same time apply CVD law, as if China were a market economy, are discriminatory. The United States should recognize the progress China has made and treat China as a market economy. Doing so would do more to help liberalize China's financial sector than threats of protectionism.

Structural and political reform will be necessary if China is to remove domestic imbalances and quell U.S. protectionist pressure. The most important reform would be to fully implement the Real Right Law that the National People's Congress passed in March. Doing so would help depoliticize economic life, thereby reducing corruption, and advance civil society by increasing personal autonomy. Stronger property rights will also help China achieve capital freedom, by giving people a wider range of investment choices.

Private property rights would help establish real capital markets and competitive interest rates. Capital would be allocated more efficiently. Finally, moving closer toward a market-determined exchange rate would free the PBOC to focus on ensuring a sound currency by promoting long-run price stability.

It is in China's self-interest to follow the path of the market in order to promote "peaceful development." Meanwhile, U.S. policymakers should work to restore market liberalism and limited government, and follow Secretary Paulson's advice to "not heed the siren song of protectionism."