Patrick Lui Sing Lui
On 24th June, the United States and European Union together lodged a case at the World Trade Organization over export quotas on raw materials by China. This move stems from China’s introduction of “Buy Chinese” policy which was aimed at retaliating against the “Buy American” legislation in her US counterpart.
The EU and America argued that China’s export duties have distorted the global market prices and harmed their domestic manufacturers. Yet, this action is often deemed unconvincing – in accusing China of adopting protectionist policy, they do not come with clean hands. The stimulus package of the US has included a requirement to Buy American in an attempt to revive its local market.
This kind of tug-of-war in which countries repeat retaliation often occurs in times of economic recession, climbing unemployment rate and widening international trade imbalance. While trade restrictions seem to have positive effects on local producers as it rules out foreign competitions, nearly all main stream economists believe that this benefit is short-term and that, in the long run, worse still, would hurt the local market. By the principle of comparative advantage, every country can gain by specializing on the production in which they have a comparative advantage. The Chicago school of economics, which is the biggest school of thought supporting free trade against protectionism, argues that protectionism wipes out this benefit and results in deadweight loss.
The current incident resembles the Tariff Act of 1930 after the stock-market crash of 1929 in the US. The Smoot-Hawley Tariff imposed a tax rate of 60% on imports of America. This gave rise to an immediate increase on its industrial production and factory payrolls. Nevertheless, this short term benefit was done at the cost of long term loss. As Canada, France, Germany and other main developed countries subsequently retaliated by means of increasing tariffs, developing new partners and developing an autarky, it was estimated that each country had suffered from declining GNP for about 14% as a result of declining international trade over the period.
The protectionist tug-of-war of 1930s ended as Bretton Woods took a series of actions to promote multilateralism and interdependence among countries. There are many resemblances between that and the current protectionism. Some might put their hopes on Obama’s reform on its porous diplomatic policy but it is still a long to go to end this de-globalization.
The EU and America argued that China’s export duties have distorted the global market prices and harmed their domestic manufacturers. Yet, this action is often deemed unconvincing – in accusing China of adopting protectionist policy, they do not come with clean hands. The stimulus package of the US has included a requirement to Buy American in an attempt to revive its local market.
This kind of tug-of-war in which countries repeat retaliation often occurs in times of economic recession, climbing unemployment rate and widening international trade imbalance. While trade restrictions seem to have positive effects on local producers as it rules out foreign competitions, nearly all main stream economists believe that this benefit is short-term and that, in the long run, worse still, would hurt the local market. By the principle of comparative advantage, every country can gain by specializing on the production in which they have a comparative advantage. The Chicago school of economics, which is the biggest school of thought supporting free trade against protectionism, argues that protectionism wipes out this benefit and results in deadweight loss.
The current incident resembles the Tariff Act of 1930 after the stock-market crash of 1929 in the US. The Smoot-Hawley Tariff imposed a tax rate of 60% on imports of America. This gave rise to an immediate increase on its industrial production and factory payrolls. Nevertheless, this short term benefit was done at the cost of long term loss. As Canada, France, Germany and other main developed countries subsequently retaliated by means of increasing tariffs, developing new partners and developing an autarky, it was estimated that each country had suffered from declining GNP for about 14% as a result of declining international trade over the period.
The protectionist tug-of-war of 1930s ended as Bretton Woods took a series of actions to promote multilateralism and interdependence among countries. There are many resemblances between that and the current protectionism. Some might put their hopes on Obama’s reform on its porous diplomatic policy but it is still a long to go to end this de-globalization.
No comments:
Post a Comment