Should we expect a protectionist China?

During the Great Depression, it was the Smoot-Hawley Tariff Act, which in hindsight is blamed for triggering a wave of protectionist actions globally.  Protectionism was a major contributor to the downward spiral that created depression.  So, have we avoided this kind of outcome this go around?

At this juncture, it is pretty unclear we have. Simmering disputes with China in particular are creating anger in Beijing.  First, there was the U.S. steel industry complaint over the dumping of cheap Chinese tires in the U.S.  This dispute has received little press.  However, the International Trade Commission(ITC) has just sided with U.S. steel interests. I reckon the issue will now become more important.

Then, there was the link between Rio Tinto, the Australian commodities producer and Chinalco, the Chinese commodities company. Rio got itself in a bit of a mess when it leveraged up only to see commodity prices tumble. As a result, the company was forced into the arms of Chinalco.  But, Australians and Rio shareholders did not like the concept of the Chinese having such a huge stake.  So, BHP Billiton came to the rescue and Chinalco was stuffed (and received a hefty breakup fee).

These types of things are really getting the Chinese sour.  And the China of 2009 is akin to the United States of 1930 as Alpha Creditor to the world economy. So, when just days ago Beijing started a ‘Buy China’ policy, we should realize that a Smoot-Hawley outcome is still something we need to act vigorously to avoid.  It is protectionism in China as retaliation that we must worry about.

Now that the U.S. has received a green light from the ITC to restrict Chinese tire imports, it will be instructive to see what the Obama Administration does.

4 Comments
  1. aitrader says

    I find it a bit counter-intuitive that China would go the way of protectionism based on the fact that its economy has been driven by exports since Deng Xioaping changed their economic model. That aside they have a long cultural history of isolationism reaching back from Mao to ancient dynasties. Since trade has collapsed globally their only option seems to be to develop their internal markets. Protectionism would allow this without competition from outside companies that could “muscle out” nascent Chinese firms. The recent exclusion of wind power titans Vestas, GE, and Gamesa is a case-in-point ( http://www.forbes.com/2009/06/18/china-trade-conflicts-markets-economy-wto.html ).

    If one follows this protectionist trend to its logical conclusion it begs the question: will the Chinese continue to purchase US Treasuries in volume as they move away from export driven growth?

  2. kynikos says

    “Protectionism was a major contributor to the downward spiral that created depression. ”

    It probably contributed a little bit.

    http://www.exponentialimprovement.com/cms/smoot.shtml

    Here is the GDP data for the Smoot tariff. The loss in exports GDP was about 2.5% the amount of the total drop in GDP in the great depression.

    China cares for its interests primarily. If protectionism and mercantilism is in its interests, it will adopt those policies even if it harms other nations. I suppose a key macroeconomic theme (as described here) is the hallowing out of the Western middle class in countries that have an Anglo-Saxon labor market. This is caused by stagnant wages from competing against immigrants and third world labor. Increasing consumption is not provided by increased earning power, but by the accumulation of debt. One can make money from globalization by importing goods made in countries with cheap labor to countries where firms still retain significant pricing power. Globalization in the long run seems to undermine the earning power of the Western middle class and it profits from its intertemporal preferences that prefers short term consumption over long term saving.

    So could multinationals rely on China? Of course, there are a lot of workers in China and that would serve to depress domestic wages (and consumption) despite their enormous savings. Chinese protectionism would destroy the thesis that Chinese consumption would help lead the global economy to recovery. I do not think China could replace the Western middle class.

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