Article review – Who’s afraid of the dragon? New research quantifies the effects of Chinese imports

The effects of a trend towards liberalization of markets resulting in increasing trade among countries has brought positive and negative effects to many countries’ economies. Exemplifying the positive and negative aspects of free trade, is the Economist article that reports the findings of two studies that quantify how Chinese imports have affected various aspects of the U.S. economy. On the negative effects of Chinese imports, one of the reported studies found out that increasing Chinese imports contributed to higher unemployment levels, lower wages and decreased labor force participation, especially in regions where Chinese imports provided alternatives for products manufactured in such regions. On the positive end, another study whose findings are reported in the Economist article, argued that increasing competition brought about by Chinese imports had induced a growth in firms’ investment in such aspects as research and development and information technology, thus leading to innovative approaches that bettered the quality of products and services rendered to consumers. Accordingly, Chinese imports, although driving some firms out of the market, forced others to upgrade their offerings to offer better solutions to consumer needs.

Apart from the reports about the findings of the two studies, the Economist article notes of actions of the U.S. congress related to such findings. On the one end, the congress seemed to promote free trade by ratifying “long-stalled trade pacts with Colombia, Panama and South Korea” as reported in the article. On the other end, the congress had adopted a protectionist approach towards China by passing a bill that aimed to regulate imports it perceives to benefit from an undervalued currency. The regulation, as evident from the bill passed, would be by applying countervailing tariffs on such imports. The article then points out that such a protectionist approach may not be beneficial in the long term, advising that a better approach would be to offer improved assistance to entities that lose business due to trade.

The Economist article highlights some of the challenges that face countries as they balance the competing objectives of allowing free trade to spur competitiveness in the market, and implementing protectionist approaches to avoid unfair competition that leads to failure of domestic entities. In the U.S., such a challenge has been evident in its trading relationship with China. Resulting from cheap imports  from China and a largely consumption driven economy in the U.S., the U.S’s balance of payments, with respect to trade with China, has constantly been adverse. Whereas many factors (e.g. lower production costs in China) could have contributed to the Chinese imports being relatively cheaper as compared to the products manufactured in the U.S., the perspective in the U.S. has been that Chinese government proactively intervenes in the currency markets to ensure its currency’s value remains lower as compared to the U.S. dollar (Morrison & Labonte, 2010).

With a lower value of the Chinese currency in comparison to the dollar, importers in the U.S. would then be capable of importing more goods with constant dollar amounts thus offering such goods at cheaper prices in the market. Such an increase in cheaper imports would then make it difficult for manufacturers in the U.S to compete effectively when their costs of production remaining substantially high. Accordingly, they may reduce their labor costs to remain competitive, for instance, by outsourcing some of their processes to lower-wage countries. Such activities reduce employment opportunities in the country, which could result in social pressures to force the government to protect home manufacturers to ensure jobs are retained. The Economist article thus captures the challenges that could prevent the realization of a liberalized global market. Whereas free trade may result in better products for the consumers resulting from fair competition practices, it could lead to failure of home-country industries that provide employment to the country’s citizens. Such a scenario then necessitates government intervention to provide an environment that lowers the cost of production for home-country manufacturers, while allowing competition from imports to spur such home manufacturers to develop innovative approaches of doing business.

References

Morrison, W. M. & Labonte, M. (2010). China’s currency: an analysis of the economic issues. Congressional Research Service, 7-5700, RS21625.

Who’s afraid of the dragon? New research quantifies the effects of Chinese imports (2011, October 15). Ecomist. Retrieved from http://www.economist.com/node/21532339

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