China’s soaring exports have got the rest of the world worried, says Simon Wilson. Could this mean that protectionism is once again rearing its ugly head?
What is protectionism?
An attempt to protect particular sectors of a domestic economy by putting up barriers to the international flow of goods and services. Protectionist measures include tariffs (taxes on imports) and import quotas. More subtle protectionist measures include trade regulations based on quality controls, which can operate as a form of hidden protectionism within a free-trade area such as the EU. Although there are some good economic arguments in favour of very temporary protection measures (for example, in order to nurture particular infant industries), most economists see protectionism as damaging; it defends short-term special interests, but in the long run probably makes us all poorer.
Is protectionism on the rise?
Yes. In March, France’s President Chirac persuaded EU leaders to water down a new directive that would have created a European free market in service industries and jobs, like the one already in place for manufactured goods. A research consultancy, Copenhagen Economics, calculates that the directive’s net result would be the creation of 600,000 jobs across the union’s25 countries, mostly in the EU’s new member states (where regulations are lighter and trade unions less powerful). But their gains would have come at the expense of big countries, such as France. In a none-too-subtle warning, Chirac declared that “ultra-liberalism is the communism of our age”, which means that the rise of ‘Anglo-Saxon’ free-market policies are reducing France’s prosperity and power relative to the EU minnows.
What about in the United States?
There, too, support for lowering trade barriers has been eroded in recent years, as worries over globalisation have mounted. Recently, President Bush negotiated a trade pact with the Dominican Republic and five Central American nations: the Central America Free Trade Agreement (CAFTA). The six nations in question already have free access to US markets for many goods, and the new pact would give US producers open access to theirs. Currently, the CAFTA six are protected by high tariffs, making US products artificially expensive; removing the barriers would spur US exports and jobs, and increase farm exports alone by $1.5bn. But the treaty is under fierce attack in the US Congress, even from Republicans who were in favour of the NAFTA agreement with Mexico and Canada. The sugar lobby – a powerful political force that contributes to both parties – is terrified that the CAFTA treaty would start to open up their highly protected US market. Also, the treaty has run up against the prevailing mood of unease in the US over trade with other countries. The soaring trade deficit, the fitful nature of growth in jobs, plus the rapid ascent of China as the world’s manufacturer, have all made American industry very nervous.
How much is China exporting?
In 2004, China accounted for about a quarter of America’s $617 trade deficit. But with the rest of the world, China actually ran a smallish deficit of $47bn. This year, that has changed: in the first two months of the year, China ran an overall trade surplus with the world of $10.9bn, compared with a $7.9bn deficit the previous year. Toys, clothing, furniture and TVs from China have dominated the shelves of US retailers for years. But now they are being shipped in growing quantities to everywhere from Britain (up 42% in the same period) and Germany (44%) to Spain and Indonesia (both 75%).
What’s caused the surge?
In part, it’s because China is entering new global-export markets, such as steel and chemicals (steel exports rose fivefold in the first two months of 2005, year on year) and is importing less heavy machinery and fewer cars, as it makes more of its own. But in addition, China’s clothing exports got a huge boost when worldwide textiles quotas were lifted on 1 January: EU imports of Chinese tights and underwear leapt twentyfold in the first two months of the year (compared with last year). Imports of jumpers were up tenfold.
What’s the response?
National governments and the EU Commission are under pressure from the clothing trade to impose measures to safeguard them from Chinese exports. EU trade commissioner Peter Mandelson is currently caught between angry demands for immediate curbs from France and Italy, and protests from others that such a response would amount to protectionism. In the US, the rumblings are also getting louder. Textile producers have demanded new quotas on Chinese clothing – now being considered by the government – which would limit China to 7.5% annual growth in US sales. In addition, the US Senate is considering a bill to impose a 27.5% tariff on Chinese exports unless Beijing revalues its currency, the renminbi, currently pegged at 8.28 to the dollar.