Trade, protectionism and the lack of sound money

We have never heard a poor person, or any other for that matter, complaining about being able to access cheaper goods. And yet so many people in SA love to hate the Chinese for giving us cheaper clothing.

Because local manufacturers cannot produce clothing as efficiently and as cheaply as the Chinese, in an effort to protect the industry, the SA government imposes import taxes of up to 45% of the cost of such clothing. Since this clothing is still cheaper than what our local manufacturers can provide, it is a tax that ultimately is borne, not by the importers, but by some of the poorest consumers in the country.

Is it morally justifiable for government to deliberately take money from the poor to prop up the businesses of some clothing manufacturers so that, as the manufacturers argue, their employees will not lose their jobs? Especially when those same manufacturers are simultaneously insisting that their SA competitors, such as those based in Newcastle, should be closed down because they, with their employees’ knowledge, are paying below the government-mandated minimum wage in their efforts to compete with the Chinese?

These questions have to be considered in context. Freer trade gives consumers access to the most efficiently produced goods at the lowest prices, wherever they may be produced. The real issue is whether it is the consumers who should decide what goods they buy and who produces them, or if these decisions should be made on their behalf by their governments.

Inevitably, producers (owners and their employees) in any country who are being out-competed by those in another will clamour for protection from “unfair” competition. And their proposed solutions, inevitably, will lead to the imposition of “unfair” costs on consumers.

A similar question arises regarding wages paid to employees. Should it be the employees who decide what is an acceptable or “decent” wage, or is this another decision to be made on their behalf by government, even if it means that millions of people will go without jobs? This tactic is an echo of when SA’s apartheid government relaxed the labour laws to allow “black” entrants into the skilled labour market, and the “white” unions insisted on “the rate for the job”. In other words, they insisted on a “decent wage” in order to block competition from new entrants who may have been prepared to work for lower wages.

Protectionism in trade and the labour markets adds costs that are paid by consumers, in many cases with little real benefit for local factory workers as the supposed beneficiaries of tariff walls, and the unemployed, who are “protected” from accepting jobs that are not “decent”. Freer trade and freer labour markets allow for rapid adaptation. It is imperative that workers and owners of capital should not be locked into uncompetitive economic environments by laws and regulations that limit their scope for change.

Clothing might be the most obvious trade area where Chinese mass production has forced change in other countries, but there are many others, such as the manufacture of electronic goods. Rather than relying on government to erect a tariff wall behind which to hide, SA clothing manufacturers should adapt by finding areas in which they have a comparative advantage, possibly in unique designs, clothing that does not lend itself to mass production, or in rapid turnaround times.

Some commentators complain that China undervalues its currency (the yuan) and cite this as a subtle form of Chinese protectionism. They claim that by keeping the value of its currency artificially low, the Chinese subsidise their export sectors by giving them a competitive advantage.

It is argued that this subtle form of protectionism hurts SA by destroying our clothing manufacturing sector and contributing to our unemployment problem. But are the critics correct in blaming the Chinese for the difficulties experienced by our clothing manufacturers?

A major argument for protection of SA clothing manufacturers is inextricably linked with the international urging for the Chinese government to allow the yuan (renminbi) to strengthen against other currencies, including the rand. According to the critics a yuan at its “correct” price would increase the price of Chinese exports to the point where manufacturers in other countries would be able to compete on a level playing field but an examination of the facts suggest that it is efficiency and not an undervalued currency that makes Chinese goods so competitive.

Until 1994 the yuan depreciated steadily against the dollar and China experienced volatility in its GDP and inflation rate. To solve the problem the Chinese government fixed the yuan to the dollar from 1994 to 2005, which brought China’s inflation rate in line with that of the US, an average of 0.75%. Between 2005 and 2008 the yuan appreciated by an average of 7.25% against the dollar, its average inflation rate increased to 3.49% and the volatility of the GDP also increased.

Compared to the dollar, the yuan’s exchange rate has increased so the charge of an undervalued yuan is unwarranted. If anything is to blame for the constant squabbling over exchange rates and threats of trade wars, it is that there is not a universal currency that is “as good as gold” for nations to use in their exchanges.

What our ailing clothing manufacturers ignore is the fact that South African exports to China have increased immensely. To introduce the desired measures to protect the clothing industry will therefore not only penalise the poor by making cheap clothing less easy to come by, but will put other industries, and their workforces, in jeopardy.

Authors: Jasson Urbach is an economist and Eustace Davie a director of the Free Market Foundation. This article may be reprinted without prior consent but with acknowledgement to the authors. The views expressed in the article are the authors’ and are not necessarily shared by the members of the Foundation.

FMF Feature Article / 5 April 2011 & Policy Bulletin / 15 November 2011

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