Buy Domestic Policies Put Free Trade and the Global Economy at Risk

As the unemployment rate jumps ever higher and the global economic downturn drags on, many governments around the world are reconsidering their commitment to free trade policies. When US President Barack Obama pushed for a clause requiring the purchase of U.S.-made steel and iron in $787 billion stimulus package in January, many trading partners including the Chinese government decried the "Buy American" measure as a dangerous step toward trade protectionism. Many observers expressed concern that this “me-first” approach would lead to similar policies around the world.

In June their fears were realized when China responded by announcing its own “Buy China” plan. A directive from Beijing gave Chinese companies first, and nearly exclusive, priority in winning contracts under the country's nearly $600 billion stimulus program.

When the U.S. government debated adding a "Buy American" requirement to its stimulus bill, China protested loudly. Chinese officials called the move toxic and protectionist. "History and economic theory show that in facing a financial crisis, trade protectionism is not a way out, but rather could become just the poison that worsens global economic hardships," said a Xinhua editorial in February.

And this was just the beginning. China has also announced plans to help struggling exporters by reducing or eliminating export taxes on nearly 100 categories of goods including some agricultural products and fertilizers starting next month in its latest move to help the country's flagging trade sector. While the policies give at least some relief to exporters, they contribute little to fixing the main problem of restoring external demand, industry analysts were quoted in the Shanghai Daily as saying. The Ministry of Finance said 31 types of goods such as wheat, rice and soya beans will be exempted from export taxes starting in July.

The policy debate raises the question, what does “buy American” actually mean in our global economy? With supply chains spread the around world, it is not as simple as it was in the 1980s when “Buy American, it could be your job” was the American industry’s response to Japanese imports. In fact, the “Made in China” label means many American companies, and their stock investors, benefit as well.

As many China observers have noted, a number of struggling US-based firms including Motorola, Dell, along with countless other manufacturers, are successfully selling billions of dollars worth of mobile phones, computers, and Buicks manufactured in China to Chinese buyers.

In fact, the U.S. business community's enthusiasm for the world's most populous nation remains unshaken. For example, a survey released in mid-December 2008 by the 4,000-member American Chamber of Commerce in Shanghai indicated that "China remained a bright spot for U.S. companies in 2008," with 78% of respondents expecting increased revenues over 2007. More than 70% of respondents reported achieving profitable operations, 77% of those realizing increased profits, and 60% said that "accessing China's domestic market" was the top priority for their company.

Take bankrupt General Motors, which is now majority-owned by the American taxpayer, as an example. It recently said sales in China rose 38 percent to a record high in the first half as it rode on fast growing rural markets boosted by China’s stimulus package. Without its popular Buick brand in China, the company would have failed years ago.

And according to traditional trade statistics, American branded products produced by American companies in China are not considered American, but Chinese. Consider a Motorola mobile phone which includes value-added technology from its U.S R&D centers. When this US-based firm exports a mobile phone to America from its factory in the Chinese city of Tianjin, a very small percentage of the product’s overall value comes from its Chinese final assembly work.
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We live in an interdependent world where a strong and vibrant Chinese economy helps everyone. And research shows Chinese exports to America often help poor people in the West make ends meet. In November, The American reported on a research paper titled “Inequality and Prices: Does China Benefit the Poor in America?” It showed that from 1994 to 2005, much of the increase in U.S. income inequality was actually offset by a decline in the price index of the goods that poorer households consume. The study found that in the sectors where Chinese imports have increased the most (especially nondurable goods such as canned food and clothing), prices have fallen dramatically. It was estimated that about one-third of the price decline for the poor is directly associated with rising imports from China.

In the middle of a painful economic downturn, sound policy choices often fall victim to political calculations. From this perspective, the inefficient producers in society (read General Motors) and their labor unions mostly in traditional manufacturing industries provide the protectionists like Obama millions of dollars in campaign contributions during every election cycle. As a democratically-elected official seeking votes, Obama is not going to bite the hands that feed him.

American consumers, who benefit the most from the competition that free trade brings, usually do not take the time to think about the advantages of imports when they buy Chinese-made products at Wal-mart. Chinese-made products help keep prices low, which in turn leads to lower interest rates and higher rates of economic growth.

Given the political and economic reality, the outlook in the near term is not so bright. "We're going to see a significant rise in protectionism. There's no way around it," says Michael Pettis, a professor of finance at Peking University was quoted in Time magazine as saying. "In order to avoid it we need real statesmanship from the U.S., China, Europe and Japan. So of course I'm pessimistic."

Brian Schwarz is author of the China Challenges blog found here:
http://chinachallenges.blogs.com/my_weblog/

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