Thursday, June 18, 2009

Building Walls

Getting involved in a tit-for-tat with the United States, China has decided to promote nationalist economic policy.

From The Associated Press:

Image from Time

BEIJING (AP) — China has imposed a requirement for its stimulus projects to use domestically made goods — a move that could strain ties with trading partners after Beijing criticized Washington's "Buy American" stimulus provisions.

Projects must obtain official permission to use imported goods, said an order issued by China's main planning agency and eight other government bodies.

Even before the order, business groups worried that foreign companies might be excluded from construction and other projects financed by Beijing's 4 trillion yuan ($586 billion) stimulus. Foreign makers of wind turbines complain they have been shut out of bidding on a $5 billion stimulus-financed power project.

"Government investment projects should buy domestically made products unless products or services cannot be obtained in reasonable commercial conditions in China," says the order, dated June 1 and reported this week by state media. "Projects that really need to buy imports should be approved by the relevant government departments before purchasing activity starts."

Read On
I can see why China is doing this. They're responding to the actions of other countries. I can also see why, if available, it would be better to buy something in China as opposed to buying a similar product from abroad.

While I get why, economically, China would add this new provision to its stimulus, it seems like a dangerous political path to do down considering how important foreign exports and imports are to China. China has more to lose than just about any country if the world's economies all go insular.

I suppose I'm holding China to a higher standard than the rest of the world, but it seems to me like China would be smart to continue to try to promote what's gotten the country ahead, foreign trade, even if the other countries in the world are making globalization difficult.

An editorial from The Telegraph discusses China's actions:
As the world’s top exporter with a $400bn current account suplus and an economy that lives off the America and European market, it will pay the highest price if it triggers a global retreat into protectionist blocs.

The Chinese elite no doubt feel provoked by what they call the “poison” of the US `Buy American’ clause, but the Obama White House managed to tone down the worst excesses of Capitol Hill and in any case the Chinese version is more restrictive.

It bans the purchase of foreign equipment for investment projects unless a special exemption is obtained. The measures apply to European goods, even though EU states have not imposed any such “Buy Europe” clause of their own. EU producers of wind turbines have already been excluded from a $5bn wind project, whether or not they have factories in China.

Beijing risks making the same catastrophic error as the US Congress when it passed the US Smoot-Hawley Tariff Act in 1930. America was then the rising surplus power, like China today. It was the chief beneficiary of an open global system.

By imposing tariffs, Washington triggered massive retaliation. While nobody escaped the Great Depression that ensued, the effects were unequal. The US suffered a far steeper decline in output than the rest of the world. Britain muddled through relatively well in a trade bloc behind Imperial Preference.

Read On
China, the lone "beacon" of the world economy, is sputtering. It's exports and imports both continued their free-fall in May. It seems premature to me that some are saying that China is getting out of its funk.

Maybe the domesticating of economies around the world is the right thing to do at this time. My gut reaction is that it's a bad idea. But maybe it is the bitter medicine that the globalized world needs. The globalization that's occurred over the past couple decades certainly led to a lot of unsustainable growth and has a lot to do with the mess that we are in now.

China very well may see the way things went for the past decade as obsolete and a recipe for disaster. All of the export-led growth certainly hasn't been a completely smooth path for the country. I wouldn't blame China for wanting/needing to change the direction its economy.

Of course, if China and the rest of the world shifts course on globalization and tries to right the imbalances that came about during the last decade or two, then everyone in the world needs to re-think what "recovery" is going to look like when that happens. That kind of recovered world definitely wouldn't look like the world of, say, 2007.


Ramesh said...

Mark - Actually I see politically why China is doing this but can't see the economic logic !! Politically China is just flexing its muscles. The citizens are mistakenly happy that the money is being spent "in China". The EU can do little but make some noise and then quieten down. This is no going to trigger a lasting trade war.

The economic logic is more dodgy. Globalisation, for all its faults has improved the economic well being of the whole world. Globalisation is not at fault for this recession. I come from a country that disastrously practiced "domestication" for decades. You have to just see the difference between India and China to demonstrate that globalisation is infinitely better.

Mark said...

I see what you mean, Ramesh.

The "buy Chinese if possible" is what I see "making sense economically." If it doesn't make sense to you, I understand why you would disagree!

I realize that such a provision is questionable since it is getting the government involved with free markets. But I can at least see where China is coming from economically on this.

Politically, yeah, China is flexing its muscles. And at this point, that is something the country is definitely concerned about.

I just think it sends a bad message politically since their supporting of the building of walls between economies will probably make more countries get involved in such practices.

You very rightly point out that globalization has worked and that looking at the differences between India and China is evidence of that.

As I said, my "gut reaction" is that domesticating economies is a bad idea. The idea of getting into such a world economy scares me and I think it is counter-productive.

But if China (and America and the rest of the world) is really serious about building these kinds of walls (I hope you're right that they're not and this is all just rhetoric), I could see some "benefits." These benefits would be the (possible) building of a realistic (not 10%+ annual growth) and non-bubble-based economy fueled by less energy-intensive means.

That (possible) world would be very different than the Guangzhou you're living in now or the US where I grew up.

I really would like for globalization to continue (I love the ideas spouted by neo-liberal Thomas Friedman in "The World is Flat").

I'm just afraid that with countries everywhere flexing their muscles and trying to outdo one another, that we may be getting away from such a world.

History shows us that bad economic times can make countries and people act quite irrationally.

Unknown said...

I don't agree with you that globalisation is partly responsible of the current mess. Certainly, the large Chinese current account surpluses which were invested in US Treasuries helped in lower interest rates and, and chinese exports contributed to lower inflation in US and elsewhere contributed also to lower US policy interest rates. But the current mess is largely mistakes of the US financial sectors and their regulators.
Buy China as well as Buy American, or any other variant, is, to put it mildly, dangerous because it invite retribution or beggar-thy-neighbor policies. These policies in the 1930's made the world economy much worse than the original Wall Street colapse in 1929-30.
Furthermore, Buy China means that inward looking protagonists are winning against those that don't fear foreign competition (those that propound open China policy). This, perphaps is more worrisome.

Mark said...

That's a good point, Fernando.

It is probably wrong of me to say that globalization helped cause the crisis. It's probably more of the case that globalization was going on when the financial crisis occurred. The two not being related though.

When I wrote that, I was thinking of exactly what you wrote: China financing the US debt. But that didn't necessarily have to be the case. It just did because of the circumstances of the two countries.

Thanks for the thoughtful comment.

Anonymous said...

The root of the problem I think is imbalance. The US, in the grand scheme of things, produces nothing right now. If our only contribution to the global economy is that we consume, well, at some point we pay the piper and are doomed. I think its only natural that we want to encourage more domestic buying so that the trade isn't such a one way street.

If the trade was more balanced, I could see being outraged by such policies. But when you produce most of the world's goods and your reaction to other countries wanting more of a fair shake is 'well screw you guys, we'll only buy domestic as well'; then your thinking about as clearly as someone who takes a loaded gun and shoots himself in the foot with it. China is clearly struggling with the diplomatic aspects of being a world power.

@Fernando "Buy China as well as Buy American, or any other variant, is, to put it mildly, dangerous because it invite retribution or beggar-thy-neighbor policies".... So true. Over here in the states I was disgusted to recieve an email (one of the mass emails that extreme right wingers send over the net on a weekly basis) calling for the boycott of everything made in China. I could only think, how cowardly. Its only the cowards who want to isolate themselves in my opinion and are afraid to compete.

This is a tough issue, countries clearly have the right to expect fair trade, but at the same time, these "Buy only xxxx" campaigns go so against what global trade and symbiosis is about. There has to be a compromise.

Mark said...

Hopfrog, your second paragraph says what I was trying to say in the blog post. Your writing is better though. What you're saying is the "political" problem that I'm trying to point out.

As for America, I agree that this is a tricky issue. You don't want to have America producing nothing but at the same time you don't want "Boycott China" campaigns either.

Hopefully a middle ground can be found.