The Price Of Protectionism
by David Wolf | On Engaging China
More interaction with China makes sense for reasons that go beyond the benefits of unfettered trade.
2005-11-07
There are, broadly speaking, three ways firms and policy-makers can react to the emergence of China and other rapidly developing economies in Asia--ignore it, shut it out, or engage it. No points for guessing which strategy is likely to work out best.
Ignoring China's emergence is likely to work about as well as it generally does to shut one's eyes and pretend something potentially unpleasant isn't there.
Shutting it out, as many strident voices in the U.S. government in particular have threatened, is not likely to work much better. History has shown time and again that protectionism is at best a short-term fix, coming at great longer-term economic cost. As Fed chairman Greenspan warned the Congress earlier this year at hearings on China, "any significant elevation of tariffs that substantially reduces our overall imports, by keeping out competitively priced goods, would materially lower our standard of living. A return to protectionism would threaten the continuation of much of the extraordinary growth in living standards worldwide, but especially in the United States, that is due importantly to the post-World War II opening of global markets. Such an initiative would send the adverse message to our trading partners that the United States, while accepting the benefits of broadened world trade, is not willing to absorb the structural adjustments that are often necessary."
Superficially, the emergence of China has put at least as much economic pressure on Canada as on the United States to put up that kind of shield. Canada's trade deficit with China, as a share of our economy, is as big as the States' (1.4% of GDP in 2004). And while the Americans' complaint about the Chinese currency is that it hasn't risen by as much as it "should" against the U.S. dollar, the renminbi has actually depreciated substantially against the Canadian dollar (by 25% since the beginning of 2002), compromising Canada's relative competitive position that much further. Yet Canada appears to have been a lot more successful in resisting the protectionist instinct. The policy debate in Canada has been far more about how to increase trade with China than how to reduce it, sending an important signal to the private sector to get on with the business of adapting to the changing competitive environment--a signal that companies like those featured in this issue are evidently getting loud and clear.
Engaging China makes sense beyond the usual economic arguments in support of unfettered trade. A former colleague of mine has a favourite saying: "With every pair of hands comes a mouth." China's impact right now may be largely in supplying us with cheap manufactured goods, but the country's growing income earned from that production will ultimately translate into demand for goods and services more broadly; our opportunity to satisfy that growing demand will doubtless depend importantly (as Greenspan might say) on how we treat the Chinese at this sensitive stage of their economic development.
And embracing China as a market makes sense for Canada from a diversification perspective as well. With the United States buying 82% of Canada's exports, it is reasonable to say that most of our trade eggs sit in the American basket. That basket has been a fruitful one, to be sure, given the U.S. economy's generally strong and steady growth over the past 15 years. But that growth has increasingly reflected America's spending beyond its means in recent years, with the U.S. current account deficit having risen sevenfold over the past decade to a record $789-billion annual rate through the first half of this year. Most economists agree that U.S. domestic demand will have to slow in the years ahead, certainly relative to the rest of the world.
Now, the U.S. market will probably always be the critical one for Canadian trade, for reasons of geography if nothing else. But that makes it doubly important to reduce our near-exclusive reliance on that market. That need not come via reducing trade with the United States--or playing the dangerous game of threatening to--but rather should be a natural function of Canadians' identifying and vigorously pursuing export opportunities to China and other economies with bright longer-term growth prospects. Put simply, the more we engage these countries' economic development, the more we will be promoting our own.
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