Protectionism in China - Something to Worry About

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 (RTP), 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 (BHP) 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.

Comments

[Tom E.:]

Its amazing how none of the US newspapers want to talk about the "buy China" news. It is Smoot-Hawley and the US media is keeping their readers in the dark on it.

Jun 21 10:30 AM

[Dave Wrixon:]

I wouldn't worry too much about Chinese steel. They will soon be consuming everything they make, and if America can get her cost down to market levels perhaps they will even import some. LOL

Jun 21 11:40 AM

[Observer45:]

Shifting the goal post every time the forward runs with the ball near goal is not the way to deal with the situation. Two sides can play the same game and that will not benefit any party in the long run. Also, for many, the state of self denial has not inched its way out of the sand just yet. Not wanting to accept reality does not change reality!

Jun 21 11:41 AM

[CautiousInv...:]

China has the most to lose through discussion and implentation of a "buy China" policy.

China is one of top three exporting countries in the world and enjoys the highest current account surplus, making it particularly vulnerable to trade wars.

This is all the more true when you appreciate that China must import much of what it does to make it mercantilist, low wage economy function as it does.

Jun 21 11:48 AM

[Dave Wrixon:]

The Buy America clause in the Obama stimulus started all this and is particularly irksome to the Chinese because they are the only ones affected. As the US made the first volleys it is totally hypocritical (but perhaps predictable) to react in this manner.


On Jun 21 11:48 AM CautiousInvestor wrote:

> China has the most to lose through discussion and implentation of
> a "buy China" policy.
>
> China is one of top three exporting countries in the world and enjoys
> the highest current account surplus, making it particularly vulnerable
> to trade wars.
>
> This is all the more true when you appreciate that China must import
> much of what it does to make it mercantilist, low wage economy function
> as it does.

Jun 21 06:08 PM

[Trend Surfer:]

The chinese does not have the most to lose. Everyone has the most to lose.

Keep in mind that it is a misnomer that the chinese economy exists due to exports which is very unlike that of Japan. That may be true a decade ago, but not anymore. Even through this recession, the chinese economy did not enter -'ive growth. Most of chinese exports are measured not in production costs but in sale price. Further, most of its exports are made with semi-completed products imported into the country. So, that said, if China has a buy-China policy and the world retaliates, they would simply stop imports of the semi-completed products. What would suffer would be their current account numbers and their foreign reserves.

Everyone suffers in a protectionist environment. Is China merely retaliating or are they initiating? One set of rules for China and another for the west. Can't afford to play that game anymore.

Jun 21 07:09 PM

[Trane250:]

Again and again, the free traders and the one worlders cite Smoot-Hawley as the real cause of the deepening depression. Listen carefully, please. Between 1929 and 1933, over 10,000 US banks (44% of all US banks) failed taking the depositors money with them. As Milton Friedman has pointed out, the wave of bank failures (caused by fed policies) was the main factor. International trade constitured less than 5% of GDP at the time.

Jun 22 09:24 AM

[coreopsis:]

A great topic -- a weak analysis which omits the larger context. 'Buy China' follows the lead of 'Buy America' in the Obama stimulus plan. Earlier this month, in Vancouver, Bob Zoellick, head of the World Bank, criticized these 'Buy America' provisions.

It was the US ITC panel which split narrowly on the tire decision and will vote on 6/29 what the proposed remedies should be. This case was filed on 4/20/09 by the United Steelworkers union. No US tire maker supported the union's petition.

In trade wars, outcomes are seldom black and white (as is the mindset of the less sophisticated bloviators here). In the US and China trade 'war', any dramatic steps by either party could have major consequences. The US has initiated to widespread global opprobrium. Let's see what the response is.

Which country do you think has more room for internal growth: one country with nominal per capita GDP of $3,000 or another country of $45,000? [IMF, IBRD, CIA figures are all similar].

Be careful what you wish for. The Greeks had a term for this kind of pride: hubris. From the Hebrews: ¶ Pride goeth before destruction, and an haughty spirit before a fall. Proverbs 16:18. Someone care to quote the Chinese proverb?

Jun 22 10:07 AM

[sunnsea:]

Edward: Your article is the typical American naivety on international trade that dominants the airwaves. All countries EXCEPT the US are and have been protectionist because they rightly want to protect their respective countries against foreign imports that threaten their domestic industries. "Buy Chinese" is nothing new. It only is a further codifcation of what the reality on the ground. China never lowered its tariffs on imported products. But it is not only China. The EU countries place a 20% VAT on all import goods into the zone. This is not called a "tariff" but it is a tax on imports. Their domestic producers do not pay VAT on exported products, so when BMW sells a 300 series over here they only pay 2% maybe even 0% to the US plus get a 20% VAT exemption.
And of course we stupidly abandoned "Buy America" in the stimulus under Republican and Blue-dog pressure, who are on the payrolls of the foreign lobbyists via campaign contributions. In a perfect, non-protectionist world, none of these things would be needed. But only here do we suffer under some romantic vision that that world does exist when it does not. Not one other country shares this romanctic illusion, not one!
By imposing tariffs or new "taxes" on imports, we would only be redressing the grave imbalances that have helped destroy America's manufacturing base, not compounding a global recession.

Jun 22 10:28 AM

[Ferdinand E...:]

Buy American sounds good to me because I have an American passport and that country is in trouble. Otherwise I'm not so sure. And if I were calling the shots in China, I would recommend a Buy China policy, because the interior of China is still underdeveloped, and people in those regions need some industrial experience. I taught this sort of thing at a post-graduate institute in Senegal a few centuries ago, and all my students agreed that it made sense. Whether they in turn recommended it to their governments is quite another matter.

Jun 22 11:50 AM

[Jimbo:]

Mr. Wrixon: the Mexican government increased tariffs on certain U.S. imports because they felt shafted over the Mexican truck issue. Canada has retaliated because of the buy American statements in the Porkulus Bill. Sunsea raises some very valid points about how other exporting countries circumvent "free trade" by various schemes and ruses. These trade issues are most complex. And they get nasty and sticky when economies head south.

Jun 22 12:06 PM

[coreopsis:]

Sunnsea is the last romantic, indeed. He thinks the US is 'romantic', and instead his wonderfully dreamy vision of a noumenal world is anything but...he's a hardcore 'realist' like so many uninformed individuals who claim to perfect knowledge. Where is Socrates when you need him?


On Jun 22 10:28 AM Sunnsea wrote:

> Edward: Your article is the typical American naivety on international
> trade that dominants the airwaves. All countries EXCEPT the US are
> and have been protectionist because they rightly want to protect
> their respective countries against foreign imports that threaten
> their domestic industries. "Buy Chinese" is nothing new. It only
> is a further codifcation of what the reality on the ground. China
> never lowered its tariffs on imported products. But it is not only
> China. The EU countries place a 20% VAT on all import goods into
> the zone. This is not called a "tariff" but it is a tax on imports.
> Their domestic producers do not pay VAT on exported products, so
> when BMW sells a 300 series over here they only pay 2% maybe even
> 0% to the US plus get a 20% VAT exemption.
> And of course we stupidly abandoned "Buy America" in the stimulus
> under Republican and Blue-dog pressure, who are on the payrolls of
> the foreign lobbyists via campaign contributions. In a perfect,
> non-protectionist world, none of these things would be needed. But
> only here do we suffer under some romantic vision that that world
> does exist when it does not. Not one other country shares this romanctic
> illusion, not one!
> By imposing tariffs or new "taxes" on imports, we would only be redressing
> the grave imbalances that have helped destroy America's manufacturing
> base, not compounding a global recession.

Jun 22 12:14 PM

[notsosmart:]

like it or not china is still a communist dictatorship that will move the goal posts whenever it wants or feels it to be to their advantage..russia is the same but it disguises it better. china wants to filter computer content even more than it does now. do the greedy dumb-dumbs of this country need any more clues?

Jun 22 05:04 PM

[TERN:]

Sunnsea, please look at this again:

"The EU countries place a 20% VAT on all import goods into the zone. This is not called a "tariff" but it is a tax on imports. Their domestic producers do not pay VAT on exported products, so when ..."

But their domestic producers DO pay VAT on all their supplies and DO have to charge VAT to their customers, just like their competing importers. (what happens with their exported products is not relevant here)

In the EU markets, the importers and the domestic producers are treated equally, in accordance with WTO obligations. Neither can escape the VAT.
This is why VAT is not a tariff.

Jun 22 08:15 PM

[Old Trader:]

Dave,

Canada might take exception with your contention that China is the only ones affected. A dispute over lumber and pulp has been going for years.


On Jun 21 06:08 PM Dave Wrixon wrote:

> The Buy America clause in the Obama stimulus started all this and
> is particularly irksome to the Chinese because they are the only
> ones affected. As the US made the first volleys it is totally hypocritical
> (but perhaps predictable) to react in this manner.

Jun 22 10:41 PM

[JeffDB:]

On Jun 22 10:07 AM coreopsis wrote:

> Be careful what you wish for. The Greeks had a term for this kind
> of pride: hubris. From the Hebrews: ¶ Pride goeth before destruction,
> and an haughty spirit before a fall. Proverbs 16:18. Someone care
> to quote the Chinese proverb?

OK, I had to Yahoo it, but I did find the Chinese proverb, I think:

kiew bing bied bai www.geocities.com/auch...

Wikiquote has a slightly different version:

jiaō bīng bì baì en.wikiquote.org/wiki/...

Glad to help clear that up for anyone else who may not have known. ;)

Jun 23 04:36 PM

[coreopsis:]

Thanks, Jeff for posting something useful/ factual here. We'll have to wait to see if the usual suspects like SR weigh in on the language which of course is heathen and un-Christian.

The geocities quote is the Cantonese version; the Wikiquote is the standard 'Mandarin' (putonghua). The words ('characters') are the same.


On Jun 23 04:36 PM JeffDB wrote:

> On Jun 22 10:07 AM coreopsis wrote:

Jun 24 09:15 AM