Australian Professor in Japan makes case for protectionism against China

As I indicated earlier today, I generally see protectionism not as a second-best argument like Paul Krugman, but as something to avoid entirely.  Nevertheless, calls for more protectionism are being heard everywhere.  Gregory Clark, an Australian Professor who is a vice president at Akita International University in Japan, has made the case for protectionism against China in the English-language Japan Times. He says:

It’s time to start getting tough on Beijing…

It complains bitterly about Western, U.S. mainly, tariff/subsidy protectionism. But China itself indulges in a much worse kind of protectionism — exchange rate protectionism. If China’s currency is undervalued by around 20 percent, as many estimate, that is equal to a 20 percent tariff on all goods entering China, and a 20 percent subsidy for all exports. Tariff/subsidy protectionism in the West never gets as wild as this.

True, China is not entirely to blame. It has simply been taking advantage of an extraordinary lacuna in orthodox Western economic thinking — the idea that tariff protectionism is evil but exchange rate protectionism can be ignored. We saw a good example at the recent APEC summit conference in Singapore. APEC repeated its ritual calls for free trade. It had almost nothing to say about the 800-pound elephant at the conference table — the controls that Beijing uses to keep its currency consistently undervalued.

Orthodox Western economists are like the man who cannot walk and chew gum at the same time. They are obsessed about the way tariff protectionism raises costs to consumers. But handled well, tariffs are simply a tax on consumers to assist producers whose new or continued existence is crucial to the growth of the economy. There can easily be a net gain for the entire nation, including consumers. There can also be a net gain for the world economy if the strategic use of tariffs helps create vibrant economies able eventually to help expand world trade. Japan was but one example.

Exchange rate protectionism, by contrast, protects all import-competing industries, across the board, whether they deserve protection or not. True, it too can have net beneficial effects; quite a few Asian economies owe their growth to keeping their currencies undervalued for long periods. But the suffering of consumers is greater. And those economies gain at the expense of others. The distortion to world trade is far greater than that caused by tariff/subsidy protectionism.

History is part of the reason for this strange weakness in economic thinking. The 1930s Great Depression saw harmful beggar-thy-neighbor tariff policies as nations competed to protect domestic industries and employment. So the textbooks on which the current generation of economists were raised concentrated almost entirely on the evils of tariff protectionism. Meanwhile, the Cold War and other ideological factors made them favor anything tagged with the word "free" — free trade, free markets, free enterprise, and allegedly freely fluctuating exchange rates despite the ease with which those rates can be manipulated or controlled.

Before I send you off to the rest of the article, I should clear up one thing; it is patently false that APEC said nothing about China’s own exchange-rate protectionism. I wrote about it at the time. Read the article here

In any event, you can see that not everyone is against protectionism. In fact, the argument that it is China which acted in a protectionist manner first makes sense. It has fixed its currency to a plummeting dollar and that makes the Yuan artificially weak to everyone else’s detriment.  This is one reason the Europeans are starting to make protectionist noises too.

I see a protectionist response in retaliation as a likely outcome unless China changes its tune – not that I favour that outcome. We will soon know if protectionism works.

The rest of the article is at this link here.

  1. Rahul Deodhar says

    We saw that coming!

    It is only natural that economies want to protect jobs. US has been exporting jobs and importing consumption, in a sense. It is time to unwind this trade.

    At this time, we want to protect jobs. But jobs are not end in itself, they are simply means to cause consumption. So protection around consumers is more potent. At the moment US has most consumers with intention to consume. China and other developing countries have people with ability to consume (money to buy). So China protecting it’s consumers makes sense. Inappropriate responses may lead us into a protectionist wave where economies are isolated and we all become poorer.

    Yet, I can understand Chinese concerns. If you have to move half a billion people into prosperity like the developed countries, you have to use every advantage. China’s is a naive mistake. It has ignored the income polarization effects of such policy. In fact, that is a bigger threat for China rather than US or any other thing or country. I read somewhere that people are happier if THEY can attribute their situation to their efforts. If Chinese loose jobs or face income declines they will attribute it to government causing a wave of dissatisfaction.

    Now add balance sheet recession to this and what do you get?


  2. ndk says

    Thanks for highlighting this, Ed. It’s been eminently apparent to me since ’08 that the only real unilateral defense against the peg is tariffs. I completely agree with the bold, lucid reasoning here.

    Unfortunately, protectionism also means that the WTO is likely to come down on the U.S. with stiletto on balls, and other countries and multinational organizations would face the unsavory prospect of siding with one country or the other in a spat.

    It’s also completely contrary to the interests of the oligarchs, who generally draw their income and wealth from multinational conglomerates and other very large corporations. Tariffs would be subject to retaliation and would generally impact the competitiveness and profit for these conglomerates, and the resultant inflation in the U.S. would be very bad for their piles of cash.

    In short, I can’t for the life of me imagine real tariffs being enacted, even though they are quite clearly the right theoretical move.

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