Wednesday, July 11, 2007

Summer Commentary #1

CNN: Can tainted toys spark U.S.-China trade tiff?

In this article, the US accuses China of neglecting safety and quality controls, opting for large economic growth instead. Calls in Washington for trade protectionism have now strengthened after poisoned pet food, faulty toys and sub-standard human food was found in the Chinese exports to the US. These strengthened calls come after the US goods trade deficit with China rose to $ 233 billion in 2006 and have come in the form of Senators’ outcry in Congress and ads on television.

This article is describing the call for trade protectionism on the part of the Americans. The reasons for trade protectionism are the infant industry argument, anti-dumping, protecting unemployment, balance of payments, externalities and demerit goods, strategic reasons and unrealistic assumptions of comparative advantage.

In this situation we can directly identify that the Americans want to adopt a policy of protectionism because of the externalities resulting from the trade. These externalities would come in the form of poor quality goods that have already “killed dozens of animals”. The reason why the poor quality goods are still being exported to the US is because of their lower price. However, if the US adopts trade protectionism, then the Chinese goods become more expensive and thus the consumers will be more inclined to buy the better quality American goods (tariff graph omitted due to technical difficulties).

Looking deeper into the situation, we can identify that the Washington is keen to adopt protectionism to stabilise the balance of payments. The trade protectionism would also be strategic. Prior to this incident, there was already concerned talk among Washington lawmakers about “the massive US trade gap [with China]”. This situation offers the excellent opportunity to “pressure China”. Pressuring China is exactly what some US lawmakers want to do. Many claim that the undervalued Chinese yuan gives Chinese goods an unfair comparative advantage.

Looking at it from this perspective, the protectionism is also strategic. As Merrill Weingrod points out in the article, "It [the tainted goods] fuels the anti-China lobby. The next time senators want to bring up protectionist trade regulations, they'll get a sympathetic hearing." It is the perfect chance for the US to slow down the runaway Chinese trade train.

However, trade protectionism also brings about a bigger cost to consumers. This may lead to higher inflation. It could also lead to a trade war with China. Some US lawmakers are weary of this, pointing out that China holds over $ 1 trillion in US assets, making “the US economy vulnerable if China decided to dump dollars in the event of a trade war.”

Although the tainted goods may just be a bit of poisoned pet food and faulty “Thomas the Tank engine trains”, but it signifies a much deeper problem in the trade relations between the US and China. As the article title suggests, this may be the final drop.