Imposing protectionist measures against Chinese imports is not only fair but also effective and beneficial. How far do you agree with the statement?

The U.S.’ massive and sustained trade deficit is a long-term macroeconomic problem that is caused primarily by China’s currency manipulation. Thus, imposing protectionist measures against Chinese imports is not only fair but also effective and beneficial. How far do you agree with the statement? [25]

Introduction

Protectionism is the deliberate erection of artificial barriers to trade with the intent of sheltering domestic firms from foreign competition. 

Trade deficit happens when import expenditure > export revenue

How China’s currency manipulation could contribute to U.S. trade deficit

·      (RWA) China is said to have been artificially suppressing the yuan for a long period of time. It has bounced between adopting a fixed and managed float exchange rate system whereby previously, the yuan was pegged at 6.8 yuan per USD, and now, where the yuan has been allowed to fluctuate within bands set by the PBOC (China’s Central Bank).

·      By keeping the yuan weak, Chinese goods will enjoy a price advantage over U.S. goods whereby Chinese goods appear to be cheaper. This may prompt increase in demand for Chinese imports by Americans while the Chinese may reduce their imports of American goods. This would have caused the U.S. trade deficit to worsen as import expenditure increases while export revenue falls.

·      Some would argue that since the Chinese yuan has been allowed to appreciate but the persistent trade deficit remains, it is unlikely that China’s currency manipulation is the primary reason for US massive and sustained trade deficit.

How other factors could have contributed

1.  Loss of comparative advantage

·    High labour costs compared to other economies that are matching up in terms of technology and productivity

2. Rising income and consumerist culture

3. Globalisation has led to outsourcing 

·    Key U.S. exports may now be produced elsewhere (like China!)

How imposing protectionist measures against Chinese imports could be beneficial

·      By imposing protectionist measures against Chinese imports in the form of tariffs for instance, Chinese imports become more expensive and this will prompt U.S. consumers to switch to domestically produced substitutes. 

·      This will result in a fall in import expenditure (and could possibly even boost domestic consumption and therefore improve economic growth and lower unemployment), which should help to improve the U.S. trade deficit.

How imposing protectionist measures against Chinese imports may not be effective nor beneficial

1.  Possibility of retaliation

·    China could slap back similar restrictions on U.S. goods àfall in export revenue for the U.S. àtrade balance goes back to square one!

2.  Beggar-thy-neighbour

·    A fall in demand for Chinese goods by U.S. consumers could lead to a fall in (X – M) for China, affecting incomes and therefore reducing ability to consume imports from U.S. as well.

3. Higher costs of raw materials and imported inputs

·     (RWA) In certain cases where U.S. has served to impose protectionist measures on China, it actually did so on imported raw materials like steel. This increased the cost of production for car manufacturing firms, which saw a decline in export competitiveness as they had to charge higher prices due to the more expensive steel. While U.S. imports less steel from China, it also ends up exporting less cars. The offsetting effect makes such a protectionist measure ineffective.

Conclusion

Fundamentally, does not solve key problem! Protectionist measures do not address the problem of loss in CA, nor the need to improve export competitiveness, or the consumerist culture.

·      Explain other policies which may be more useful e.g. supply side policies to improve productivity