Tuesday, August 30, 2005

Protectionist producers Vs China

The world economies are now back to kindergarten. The teacher’s pet (local manufacturer), not happy about the outcome of a fairly played game (world markets), runs to the teacher (respective government) to beg for favours. Maybe the outcome of the game might be overturned or the rules changed to suit the teacher’s pet.

Ask any real/true economist and the answer will be that China is doing well and the manufacturers in developed economies feel threatened. But the western manufacturers SHOULD FEEL threatened because of comparative advantage. China has it, the west barely has any!
To quote Adam Smith's "The Wealth of Nations":
" If a foreign country can supply us with a commodity cheaper than
we ourselves can make it, better buy it of them..."
Rostow’s stages of development theory seem to be working for China. The developed economies, however, seem to have stagnated around the services (technology) part of development but are well past the manufacturing (industrialisation) stage.
Developed economies are now almost entirely run on the services sectors and their manufacturing is going. Common sense dictates that those countries in which the cost of living is cheaper, wages are lower, production is cheaper and the necessary factors of production are in abundance become the next manufacturing hubs for the world. Who wants to buy one T-shirt for £30 from Italy when you can buy the EXACT SAME T-shirt for £5 from China?
One problem with my argument, of course, is that it assumes that people are rational. It assumes that people will want more T-shirts to less. However, this assumption is voided by a study that concludes that emotions play a big role in decision making, even if those decisions leave the people worse-off. To quote from the research:
"..The problem, of course, is that people don’t always behave rationally. They make decisions based on fear, greed, and envy ...Economists understand this as well as anyone, but in order to keep their mathematical models tractable, they make simplifying assumptions. "
In this day and age, when developed economies apply protectionism, it is down to 0% economics and 100% political noise. Some fat cat somewhere with a large factory is worried about his/her "position" and wants the government to do something to prevent job loses. However, this ludicrous stance is partly the fault of the respective governments for not having policies that engender flexible labour mobility so that in the likelihood of job losses due to legitimate shifts in comparative advantage, people can move to new jobs in the expanding sectors. In theory, this is what's supposed to happen.

The large fashion houses are in Italy and France. It is therefore not surprising that the producers in these countries oppose Chinese textile imports the most. However, retailers are happy with cheaper products because they can make easier profits without excessive pricing. Consumers are happy because they are not being ripped-off under the forced illusion of "prices for quality". But when the European manufacturers voice their opinions, all I hear is bla, bla, bla, job losses, bla, bla, bla, protectionism. No sound economic points.
But it is useless to impose restrictions on China (another sign of the myopia at play). To quote the FT article "Lessons from the China textiles stitch-up":
"Indeed, the quotas may prove largely futile, because imports from
China will in time be replaced by imports from other developing countries, not by products made in Europe"

Each time a developed economy interferes with the market to protect sectors that have long lost their competitive edge, it compromises any future stances taken, it ridicules the country that does it, it is extremely childish and cannot possibly ever warrant any respect.

The FT aptly concludes that the latest fiasco (EU-China textiles) will at least have done some good if it prompts politicians to think twice before succumbing to the demands of protectionist-minded producers.


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