China and Trade during a Recession

Free trade brings growth to all nations but most of the time only in the long-term. Due to political situations that policy makers face, they often only care about the short-term. Most of the time during a recession people turn protectionist. This is because they begin to worry about unemployment and instead of blaming the government, people blame corporations. They then look to the government for protection. Most people expect the United States to lead the protectionist movement but an interesting article from the International Herald Tribune argues that it is in the hands of China:

“Just like the U.S. in 1930, China has massive foreign-exchange reserves and starts the recession in a very strong trade position. Thus, at the broadest level, Beijing has least excuse for measures to protect local employment by artificially curtailing imports. Indeed, China has, in theory at least, the most leeway to stimulate domestic demand and imports.

So far, such stimulation appears to be its principle response – but that will not be easy for structural reasons. Failure to get quick results could easily lead to protectionist responses, of which some glimpses have already emerged.

Competitive devaluations are perhaps the most dangerous. These measures start in Asia and eventually lead to formal trade barriers as protection against “unfair” trade practices. The post-September rise of the dollar against the Chinese yuan and most other Asian currencies (excluding the yen) caused concerns that the region would attempt to sustain exports with currency manipulation. In an unusually tart comment, the Asian Development Bank warned countries against buying dollars to depreciate domestic currencies. Some Asian currency declines have reversed, nonetheless the Asian instinct for currency undervaluation to boost exports is alive and well. China matters particularly because other countries such as Malaysia, Thailand and Taiwan have taken to following its lead.

India, Brazil and Russia have to greater or lesser degrees followed China on the liberalization path but now find that commodity exports are dropping dramatically while their domestic industries remain under pressure from Chinese imports. For the time being, protectionist measures by such nations have been isolated and industry-specific but more barriers will probably rise, particularly if China continues to run massive surpluses with them. In turn, these may provoke copy-cat moves by trade partners in regional arrangements.”

This is the prisoners dilemma of trade barriers. This means that it is in the best interest of all nations to have free trade but there will always be an incentive for one country to deviate. They will do this with trade barriers causing everyone to move that way and everyone will end up worse off.

Government should not turn to trade barriers to secure jobs in their country. All this does is support inefficient domestic jobs and at some point technology will overpower them and those people will have to lose their jobs. This will currently prevent labor and capital from moving to more efficient industries.

China has had a very short history of liberalized trade and their Communist government used to keep them closed off to the world. With the ever-slow move to political freedom, we should expect China to be very susceptible to political pressure. All we can do is continue to educate people on the benefits of the trade and hope that politicians choose trade freedom.

The rest is here.

~PCCapitalist

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Published in: on December 30, 2008 at 3:52 pm  Comments (1)  
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