Trade protectionism could cause economic isolation – Poole – Aug. 17, 2007
In our coming unit on International Economics we will weigh the various arguments for and against protectionism, or the erecting of barriers to trade, and examine examples of various types of protection, its aims and effects on international trade.
In the article above, St. Louis Federal Reserve Bank President William Poole warns that the US is working against trade liberalization goals established in Doha, Qatar in 2001 by playing on fears among American consumers of harmful food and toy imports from countries such as China:
Poole said in his speech that the slackening in trade liberalization could have serious consequences. “The Doha Development Agenda multilateral trade negotiations are on the verge of collapse. A collapse of the Doha round would raise doubts about the future effectiveness of the World Trade Organization,” he warned.
The current world trade talks to reduce barriers to imports are called the Doha round because they were launched in Doha, Qatar, in 2001.
Poole also said recent safety worries on product imports from China must not be allowed to create barriers to trade.
“My concern is that certain groups will attempt to use concerns over safety and job loss to restrict imports and thereby pursue an agenda of economic isolation in an increasingly globalized world.”
Recent scares following the discovery that Chinese imports of pet food and toothpaste into the United States contained impurities were compounded after a major U.S. toy maker withdrew millions of toys with lead paint.”
It is easy for retaliatory trade measures to escalate and derail the desirable movement to a more open trading environment. It is in the best interests of all the countries of the world to avoid trade wars,” Poole
said.
Ironically, some say the blame for the potentially dangerous imports from China lay not entirely on Chinese manufactures, but on American companies that own the factories producing the dangerous products. Check out this article:
Recalls: Should U.S. companies share some blame with China? – Aug. 14, 2007
The recent spate of product recalled – melamine-tainted pet food, toothpaste laced with antifreeze and a second batch of Mattel-branded toys made with lead paint – were all made in Southern China’s low-cost manufacturing hub that’s notorious for its lax regulations.But some industry watchers say U.S. importers that do business with these factories are more to blame than even their Chinese suppliers for allowing those unsafe products to enter the U.S. marketplace.
“U.S. law is pretty clear. The importer is responsible for quality and safety of goods imported into the country,” said Erin Ennis, vice president with the U.S.-China Business Council
Part of the problem, says the article, is that competition has forced American firms to cut costs wherever possible, and often this means “sourcing” production to factories owned not by the American company, but by Chinese (or Vietnamese, Mexican, Malaysian, and other foreign owners) where strict oversight of product quality is not assured. Does this mean American firms are no longer responsible for their own product safety? Should the blame be placed on China when an American company produces toys that turn out to be dangerous?
One reason manufacturing products such as toys in China (80% or the world’s toys are made in China, according to the article) is because standards for products safety are so low, so the regulatory obstacles to production are almost non-existant, making production cheap.
Another connection this article makes to our IB course is in the area of development economics. The theory of comparative advantage says that a country should specialize in the products for which its resources are most adept at production. For two decades, China has emerged as a manufacturing giant. But with new fears of product safety, and more significantly the rising cost of labor and land in manufacturing hubs such as Shenzhen and Shanghai, Western firms are looking to China’s less developed neighbors as an alternative:
“If I was sourcing heavily in China, I would be exploring alternatives like Vietnam and Cambodia,” said Sean McGowan, an analyst with Wedbush Morgan Securities, referring to rising labor and production costs in the southern China’s manufacturing belt.
If China moves towards enforcing tighter standards of product safety in its thus far highly unregulated manufacturing industry, this will surely result in higher costs of production for companies like Mattel (the toy manufacturer who recalled 14 million toys last week because of safety issues). Higher production costs in China will send firms looking elsewhere for manufacturing options (such as Vietnam and Cambodia). In effect, the demand for higher quality standards will lead to tighter regulation by the Chinese government, leading to higher production costs in Chinese factories, leading to loss of business from Western firms, leading to the opening of new factories in even less regulated countries like Cambodia.
Discussion Questions:
- Are retaliatory measures by the US government necessary to punish China for the dangerous exports that have arrived in the US recently?
- Does tighter enforcement of quality standards by the Chinese government assure products like toys being imported to the US will be safer? Explain.
- As wages and production costs continue to rise in China, how will less developed countries in Asia and elsewhere be affected?
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