Protectionist measures against China wrong

Every now and again, I think its wise to take a step back to reflect on our past so that we can gain perspective on where we are today.

So last week I turned to my bookshelf and reverted to the one book that electrified me when I was a summer intern at Bank One. Its called “Investment Biker” by Jim Rogers. Rogers was one of the fathers of the hedge fund industry, having a Wall Street background in commodities, and is considered an expert on emerging markets. On a 22-month around-the-world trek on his BMW motorcycle with his girlfriend made between 1990-1992, he reflects on the economies of the countries they rode through, taking into account the politics, economic barriers, and general freedom of movement capital has in each country. His conclusion (to no surprise): free markets work, because the success and failure of an economy is driven by the people who put their own capital at risk, not by the people who try to prevent wealth from escaping their country. Governments should do their best to support that free movement.

I too am a believer that the free market will decide who thrives and who fails, and that is why I am against the U.S. using protectionist measures against China. But where the government does play a crucial role is in the ensuring the safety of its people, who comprise the market, and building a support structure for the market to grow. This is where China is both failing and succeeding.

We are beginning to see the fallout of Chinese industrialists taking shortcuts to make money. This summer, the latest hot story globally has been the poor quality of the goods coming out of China, some that have led to tragic deaths. As a result of a Chinese vendor producing toys with a high amount of lead in the paint, Mattel is going to suffer a loss of millions (not to mention a dent to its reputation). Besides children's toys, toothpaste, medicines and food have all been discovered to be tainted or harmful in some way.

Penalties

Countries are reacting by considering banning such imports from China or imposing penalties. While that may seem protectionist, it really is not. Rogers, Adam Smith, and other free-market economists all believe that government has to play a limited but crucial role in making sure that capitalism is not prioritized over safety of society. Protecting our kids from lead paint falls in this category. More damaging, though, is the fallout. For every tube of bad toothpaste made in China, sold in Panama, and reported in the news in Iowa, consumers will become weary of buying a product made here. People will think twice about buying a car to take their kids to soccer practice if it's made in China. The central government in Beijing knows that, and is taking measures as fast as they can to ensure safety. I believe they are doing so because it is the right thing to do (after all, they want to protect their own people's safety), but I also believe they know poor product quality is not taken lightly by the market that is fueling China's growth.

Even as the market and the governments of the world react to this issue, the question remains, how does the free market help us fight off the job losses associated with plant closures and relocation to China? It doesn't directly, and that is where the government's crucial but limited role in society comes into play. Rogers reminded me that the United States, during the 19th century, was a debtor nation. The founding industrialists of America borrowed from where they could (namely wealthy Europe) to build railroads and plants, while our government borrowed to build roads, bridges, and cities. America invested into the infrastructure of the country, as that is how we sustainably grew the United States into the wealthiest country in the world.

Spending on infrastructure

This is what China is doing right. They are spending billions of dollars every year on infrastructure, from airports to railways, to hydroelectric power plants. The irony is that our trade deficit is financing some of this. In order for America to stay competitive with China, the free market and free flow of capital needs support. If America is going to spend itself into a perennial deficit, then spending it on our future is crucial. This includes new rail, transportation hubs, schools and education, and energy. This infrastructure will lead to continual investment opportunities in the U.S.

David Brooks of the New York Times recently mentioned that the benefit of globalization is estimated to be $10,000 saved by the American consumer every year. So there is a positive to the consumer for having imports (albeit safe ones) from countries like China. What is frightening is that the most recent rumblings from Washington on protectionism would do its best to destroy that benefit while simultaneously making no contribution to the rebuilding of America's infrastructure and future.

X Planey, a Mahoning Valley naive, is vice president of the Asian Relationship Management Desk, Bank of Tokyo-Mitsubishi UFJ, Ltd. He works in Shanghai, China.