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."

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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.

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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.