Does China play fair in international trade?
Friday, October 21, 2011 at 6:23PM | 2 Comments This post is a modified version on an answer I provided on Quora. You can see the original here - http://qr.ae/75Ikc
Mitt Romney and others like Columbia University economist Glenn Hubbard argue China does not play fair when it comes to international trade. Do their arguments have any merit?
As a grumpy old man once said, "fair has got nothing to do with it." China maintains an aggressive stance with regard to economic development and international trade. They use the same tools available to any other country, including the United States. The Chinese are simply industrious economic developers and adept at exploiting weaknesses in our political and economic systems. China is still a poor country in many ways and sometimes they want that next dollar of GDP more than developed nations.
But to answer the query - yes China is aggressive and many would agree unfair. Most academics and policy makers agree China engages in currency manipulation to support domestic exporters. Artificially undervaluing your currency provides a meaningful advantage in global trade and is a tried and tested approach used by many countries over the years, Japan being a prime example.
China denies domestic market access to foreign companies, through legislation, bureaucracy, and red tape. Lenovo, a Chinese computer firm, is free to compete on equal footing with Apple in the U.S. market. To sell cars in China, General Motors is required to enter into a joint venture with a Chinese owned firm. GM is required to split profits, license technology, and share manufacturing best practices.
China provides strong incentives to Chinese companies including cash grants, low interest loans, infrastructure development, protected domestic market access, and expedited government permitting. The U.S. and other countries provide similar incentives but usually on a smaller scale than China. Chinese firms are accused of using these incentives to engage in illegal dumping, or selling goods for less than the cost of production in order to drive the competition out of business.
Intelligent people disagree on the scale of these activities and resulting benefit. For my own part, the growing trade imbalance between the United States and China provides meaningful evidence of a distorted market. China accounts for ~45% of the U.S. trade deficit. The competitive advantage to manufacturing in China is one of the many headwinds facing U.S. manufacturing today. It's an issue of concern for state and local economic developers trying to support existing firms and win new site selection projects.
Reader Comments (2)