Tuesday, July 10, 2012

527 China, Japan "save" the West?

China, Japan "save" the West?

(1) China's Currency Manipulation - Peter Morici (2011)
(2) China must fix the global currency crisis - George Soros (2010)
(3) Bo Xilai championed a return to Maoism - this article from 2011,
before his fall
(4) Japan, Germany & China contribute most to IMF fund for Europe
(5) Shifting power balance sees China, Japan dig deep to save the West
(6) China and Japan need to do more than contribute to Europe's 'Begging
Bowl' - John Craig
(7) Flip side of Free Trade: Let us welcome the collapse of the Doha Round

(1) China's Currency Manipulation - Peter Morici (2011)


Pass the China Currency Bill

By Peter Morici

Asia Times, Oct 12, 2011

The China Currency Bill is the most significant jobs bill the US
Congress could pass. It enjoys the bi-partisan support of nearly 80
Republican and Democratic senators, yet President Barack Obama and House
Speaker John Boehner oppose it, illustrating both are out of touch with
the problems besetting the American economy.

The nearly US$600 billion trade deficit is destroying more American jobs
than the mortgage crisis, too much business regulation, and high
healthcare costs combined.

Americans haven't forgotten how to make things or compete. Unlike what
President Obama would have us believe, Americans are not undereducated
dolts, unenlightened in the ways of global competition. Rather, through
a failure to act on issues the president has identified - Chinese
mercantilism - and on issues where his ideology prevents action - the
development of abundant US energy - Americans are being denied their
fair opportunity to compete.

Simply, the US economy suffers from too little demand for what Americans
make. Americans are spending again, but since the first quarter of 2009,
the trade deficit is up 55%. In the second quarter, it was nearly $600
billion or 4% of gross domestic product (GDP) - thanks almost entirely
to surging imports of subsidized imports from China, barriers to US
exports into the Middle Kingdom and higher oil prices.

Every dollar that goes abroad to purchase Chinese goods or oil that does
not return to purchase exports is lost purchasing power that could be
creating American jobs. Halving the nearly $600 billion annual trade
deficit would create at least 5 million jobs.

To keep Chinese products artificially inexpensive on US store shelves,
Beijing undervalues the yuan by 40% - simply, it prints yuan and
purchases about US$450 billion annually in currency markets to keep its
currency and exports cheap. In the bargain, it uses some of those
dollars to subsidize oil imports and drive up gasoline prices in the
United States.

In addition, China provides domestic industries with more than 200
export subsidies and blocks competitive imports of US cars, alternative
energy products and just about anything else it chooses to promote.
Currency manipulation, subsidies and insidious barriers to the sales of
foreign products ranging from cars to solar panels violate the letter
and spirit of China's World Trade Organization obligations to promote
freer trade and provide open access to foreign goods in its markets.

All President Obama does is complain, Speaker Boehner prefers to do even
less, and both, with feet planted firmly in the past, cling each to
ideological prescriptions that do little to address these problems.

President Obama remains faithful to Food Co-Op Capitalism - more
government spending, income redistribution, overregulation, industrial
policies, and free trade agreements that don't reduce the trade deficit
and destroy jobs. Meanwhile Speaker Boehner adheres to Knickers Era
Capitalism - indiscriminate cuts in taxes, spending and regulation. Both
have failed America - the former since 2008, when the Democrats took
control of the House and bloated the bureaucracy and deficit, and the
latter during the first six years of the Bush presidency.

The China Currency Bill would permit US firms and workers harmed by
China's 40% undervalued currency to obtain relief through offsetting
duties until China stops intervening in currency markets. That should
jog China into finally compromising on the issue. If not, it would move
some jobs back to the United States that should not have left in the
first place. The senate was reportedly set on Tuesday to pass the bill.

American companies like GE and Caterpillar which have outsourced
American jobs and corporate functions to China and are now clients of
Beijing's protectionism have convinced President Obama the China
Currency Bill is protectionist and would start a trade war.

What China does is protectionist and America is already in a trade war -
China is throwing rocks and President Obama is throwing words. China is
bullying America, President Obama refuses to stand up to the bully, and
Speaker Boehner is just fine with that.

Growing up in a tough blue-collar neighborhood and the smallest boy at
school, I learned that whining about bullies doesn't work. Sometimes you
just need to get a big stick and strike back. After a few hard blows,
even big bullies can be brought to reason.

The world is a messy place and full of nasty people. Americans must
address it as they find it, not as Obama's friends in neatly pressed
Brooks Brothers suits tell us it should be.

Peter Morici is a professor at the Smith School of Business, University
of Maryland School, and former Chief Economist at the US International
Trade Commission.

(2) China must fix the global currency crisis - George Soros (2010)

China must fix the global currency crisis

By George Soros

Financial Times, October 7, 2010 7:40 pm


I share the growing concern about the misalignment of currencies.
Brazil's finance minister speaks of a latent currency war, and he is not
far off the mark. It is in the currency markets where different economic
policies and different economic and political systems interact and clash.

The prevailing exchange rate system is lopsided. China has essentially
pegged its currency to the dollar while most other currencies fluctuate
more or less freely. China has a two-tier system in which the capital
account is strictly controlled; most other currencies don't distinguish
between current and capital accounts. This makes the Chinese currency
chronically undervalued and assures China of a persistent large trade

Most importantly, this arrangement allows the Chinese government to skim
off a significant slice from the value of Chinese exports without
interfering with the incentives that make people work so hard and make
their labor so productive. It has the same effect as taxation but it
works much better.

This has been the secret of China's success. It gives China the upper
hand in its dealings with other countries because the government has
discretion over the use of the surplus. And it protected China from the
financial crisis, which shook the developed world to its core. For China
the crisis was an extraneous event that was experienced mainly as a
temporary decline in exports.

It is no exaggeration to say that since the financial crisis, China has
been in the driver's seat. Its currency moves have had a decisive
influence on exchange rates. Earlier this year when the euro got into
China adopted a wait-and-see policy. Its absence as a buyer contributed
to the euro's decline. When the euro hit 120 against the dollar China
stepped in to preserve the euro as an international currency. Chinese
buying reversed the euro's decline.

More recently, when Congressional legislation against Chinese currency
emerged as a real threat, China allowed its currency to appreciate
against the dollar by a couple of percentage points. Yet the rise in the
euro, yen and other currencies compensated for the fall in the dollar,
preserving China's advantage.

China's dominant position is now endangered by both external and
internal factors. The impending global slowdown has intensified
protectionist pressures. Countries such as Japan, Korea and Brazil are
intervening unilaterally in currency markets.

If they started imitating China by imposing restrictions on capital
transfers, China would lose some of its current advantages. Moreover,
global currency markets would be disrupted and the global economy would

Internally, consumption as a percentage of GDP has fallen from an
already low 46 per cent in 2000 to 35.6 per cent in 2009, as China
expert Michael Pettis has shown. Additional investments in capital goods
offer very low returns. From now on, consumption must grow much faster
than GDP.

Thus both internal and external considerations cry out for allowing the
renminbi to appreciate. But currency adjustments must be part of an
internationally coordinated plan to reduce global imbalances.

The imbalances in the US are the mirror image of China. China is
threatened by inflation, the US by deflation. At nearly 70 per cent of
GDP, consumption in the US is too high. The US needs fiscal stimulus
enhancing competitiveness rather than quantitative easing that puts
upward pressure on all currencies other than the renminbi.

The US also needs the renminbi to rise in order to reduce the trade
deficit and alleviate the burden of accumulated debt. China, in turn,
could accept a higher renminbi and a lower overall growth rate as long
as the share of consumption is rising and the improvement in living
standards continues.

The public in China would be satisfied, only exporters would suffer and
the currency surplus accruing to the Chinese government would diminish.
A large rise would be disastrous, as Premier Wen says
but 10 percent a year should be tolerable.

Since the Chinese government is the direct beneficiary of the currency
surplus, it would need to have remarkable foresight to accept this
diminution in its power and recognize the advantages of coordinating its
economic policies with the rest of the world. It needs to recognize that
China cannot continue rising without paying more attention to the
interests of its trading partners.

Only China is in a position to initiate a process of international
cooperation because it can offer the enticement of renminbi
appreciation. China has already developed an elaborate mechanism for
consensus building at home. Now it must go a step further and engage in
consensus building internationally. This would be rewarded by the rest
of the world accepting the rise of China.

Whether it realises it or not, China has emerged as a leader of the
world. If it fails to live up to the responsibilities of leadership, the
global currency system is liable to break down and take the global
economy with it. Either way, the Chinese trade surplus is bound to
shrink but it would be much better for China if that happened as a
result of rising living standards rather than a global economic decline.

The chances of a positive outcome are not good, yet we must strive for
it because in the absence of international cooperation the world is
heading for a period of great turbulence and disruptions.

*The writer is chairman of Soros Fund Management LLC*

(3) Bo Xilai championed a return to Maoism - this article from 2011,
before his fall


Redder than red is the new revolution


ON a warm May evening in the bustling central Chinese city of Changsha,
as the sun begins to sink behind the world's tallest statue of Mao
Zedong, a constant stream of buses disgorge their loads of excited

They come from across China; from Wuhan, from Shenzhen, to the capital
of Hunan, Mao's home province and only two hours' drive from his home
town Shaoshan.

Many, such as Meng Qingyun, a worker at the Daya Bay nuclear power
station, are on pilgrimages organised by the Communist Party to key
locations in the storied history of an organisation that this year
celebrates its 90th anniversary.

"Our first stop is Chairman Mao's statue and tomorrow we'll be visiting
Shaoshan," Meng says.

Mao is back in fashion.

Though born during the famine in 1958, Meng still misses the Mao era.
"We're here to pay respect to Mao," Meng says. "I miss that time, I'd
rather be living back in that time again."

Echoing the views of many older Chinese, she says: "It was a time that
everybody could trust each other and people's relationships were like
comrade and brother, unlike now, where the relationship purely depends
on money. Even if you fell down on the street, nobody will offer you a

Not every tourist is as enthusiastic. Yang, a worker from an
airconditioner factory in Wuhan in the neighbouring province of Hubei,
travelled with his workmates by bus for four 1/2 hours.

"Only party members are organised for this trip. The party committee
said that this trip is for commemoration of the 90th anniversary of the
party, but we just take it as a trip for fun."

In the mountainous city province of Chongqing to the west, local party
chief Bo Xilai is one of China's increasingly powerful princelings,
children of the original revolutionaries.

Bo is using his political wiles to play up to the sense of Mao
nostalgia, reintroducing the singing of revolutionary songs and branding
a local television station "red".

He has undertaken a remarkable anti-corruption campaign locking up
dozens of gangsters, as well as officials, in the process riding
roughshod over China's fragile legal system.

In perhaps the first case of a party official openly seeking promotion
to the very highest echelons of the organisation, Bo has been keen to
paint himself "redder than red".

"China is in an important transitional period, every group of people has
its own interest," says Yuan Weishi, a philosophy professor at
Guangzhou's Sun Yat-Sen University.

"Nostalgia of the past is also an issue of interest: some laid-off
workers' interests are not well protected in the reform, many of them
are not satisfactorily compensated or are unemployed; some officials are
losing interest in reform, since the aim of reform is meant to restrict

"Workers miss Mao's era because they have an impression that at that
time workers' social status was high.

"Communist ideology used to dominate all over China for more than 30
years after 1949, when the party took power. But after the reform and
opening up, authorities cannot have omnipresent control on the society;
civilian activities have certain space to exist. But the inertia in past
thinking persists; the red campaign in Chongqing is the resurgence of
such thinking."

Government critic Lin Mingli, whose commentary is regularly published in
Singapore and elsewhere, says that Chinese politics is "turning left due
to the fact that the authorities don't dare face reality. The 'red'
campaign is a fooling of the people by the authorities."

If China's resurgent hardliners needed any convincing about where that
reality -- however unlikely -- might be headed, then the revolutions
that have roiled the Middle East since the beginning of the year
provided an answer.

Beijing was already twitchy, on high alert against dissent since writer
and leading activist Liu Xiaobo was awarded the Nobel Peace Prize last

As the protest in Tunisia spread to Egypt, the party wasted no time in
ramping up a crackdown on its critics. Dozens of activists, writers,
human rights lawyers and artists, including the high-profile
avant-gardist Ai Weiwei, have been detained without charges, beaten, or
kidnapped for varying periods.

China's already formidable internal security apparatus continues to be
bolstered, and working conditions for foreign journalists, some of whom
have been physically attacked, have gone backwards.

The capitalist revolution -- the reform and opening up instituted by
Mao's successor Deng Xiaoping and continued by his successor Jiang
Zemin, -- that has made China the world's second largest economy appears
to be running out of puff. Or at least is taking a breather.

The privatisation of state-owned businesses, which still control many
key sectors such as resources, energy and telecommunications, has all
but ceased.

The 4 trillion yuan ($905 billion) stimulus package tipped into the
Chinese economy by a party desperate to avoid any downturn that could
lead to unemployment and social discontent was all thrown at government

"During the stimulus period . . . we have this situation where the state
sector gets a lot of resources and then spends it quicker than the
private sector," says Fan Gang, Beijing University economics professor
and government adviser.

"I would say now things are back to normal. I am not saying it's good; I
would like to see more privatisation, I would like to see more policies
towards the private sector. The issue is that the share of public
enterprise is about 30 per cent. Before that it was falling quite
quickly, but it seems to have stabilised at about 30 per cent.

"There are the natural monopolies, the resources industry, the military,
all these things are added together. Maybe it's a magic number for the

If Jiang's successor Hu Jintao has had less stomach for reform, then the
global financial crisis, which cast the Western capitalist model in such
an unflattering light, has only emboldened the left wing of the party,
giving it leverage to dampen reforms.

Three months ago, at the annual National People's Congress -- China's
rubber-stamp parliament -- its chairman, Wu Bangguo, who is ranked No 2
in the party, made the leadership's position clear in what has already
been dubbed the "Five Nos".

"On the basis of China's conditions, we've made a solemn declaration
that we'll not employ a system of multiple parties holding office in
rotation," he said.

Wu then emphatically ruled out the possibility of separating executive,
legislative and judicial powers, adopting a bicameral or federal system,
and said privatisation was not under consideration.

To do this, he said, would be to risk "chaos" and invite the "abyss of
internal disorder". Wu's comments were widely seen as a firm statement
of party consensus and, to some extent, a stinging riposte to a series
of speeches by China's Premier Wen Jiabao -- the most reform-minded of
the country's top leaders -- advocating more democracy and continuing
reform. (It's worth noting that when senior leaders in the CCP talk
about democracy it is in the context of internal party democracy and
debate, a move towards the Singapore model, rather than the multi-party
way Australians see democracy.)

The broader context of China's shuffle further left is the generational
changeover of China's leaders as Jintao, Wen and five other members of
the ruling nine-man politburo standing committee all step down at next
October's party congress.

"A couple of years before a leadership change there is always a
tightening on what I call free thought, a couple of years before the
party congress," Lowy Institute East Asia head Linda Jakobsen, who has
spent the past 25 years observing China, tells Inquirer.

"Since Tiananmen [the 1989 protests and massacre] there has been a
crackdown or at least a tightening on what is acceptable and what is
permissible ahead of the party congress.

"This crackdown on free thinking started back in 2009, so I don't think
that one can only say it's the party congress alone that has led to this
kind of fear -- I call it existential anxiety -- that the Chinese
leadership seems to suffer from. This is a nervousness about how to
manage these expectations, these wishes, these demands, that different
groups have."

Last week saw the vocal battle between right and left played out in a
more forthright way. Party veteran Mao Yushi, head of reform-minded
private economic think tank Unirule, slammed Mao Zedong in a review of a
book by former People's Liberation Army colonel Xin Ziling advocating
the official dumping of "Mao thought" as guiding party principle.

"Mao Zedong was never able to break any rules. On the contrary, he was
bound by common rules," Mao Yushi wrote. "He was never a god. Therefore,
all myths about him should eventually fade away."

Vocal pro-Mao advocates, led by the popular left-wing website Utopia,
have called for Mao Yushi and Xin to be tried for libel.

The fierce debate breaking into the public arena underscores the fact
China has reached something of a crossroads on its 30-year journey from
a broken agrarian nation, ripped apart by decades of revolution, to the
world's second largest economy with a burgeoning middle class.

The pace of change in a world of instant fortunes has thrown up a
corrupt official class as well as wealthy vested interests linked to the
party and some of its most powerful families, all of whom are happy with
the status quo.

The next steps across the slippery stream of reform -- freeing up
protected sectors, loosening restrictive capital controls and
shepherding the reams of legislation passed by the government during the
past few decades into a legal system that has some real authority beyond
party whims -- appear too difficult for now.

Authorities appear to be at a loss about how to deal with the more
complex society that is emerging in China, with its growing sense of
entitlement, and they are haunted by the collapse of the Soviet Union,
where leaders rushed the mass participation in the system and thus
authored their own rapid demise. ...

Additional reporting: Zhang Yufei

(4) Japan, Germany & China contribute most to IMF fund for Europe


Emerging economies do their bit for euro

AFP June 20, 2012 12:00AM

LED by China, emerging economies pledged huge sums to the International
Monetary Fund's global firewall yesterday, helping it raise $US456
billion ($450.5bn) in resources as the eurozone crisis rages.

In a clear statement of their new force in the world economy, rising
economic powers brought some $US95.5bn in new money to the table for the
IMF during the G20 summit in Mexico, pushing it beyond its $US430bn target.

But the money also came with a warning that things had to change at the
IMF, long dominated by the now troubled economic powers of Europe and
the US, which itself has not contributed to the firewall.

The IMF yesterday said China was offering $US43bn, Brazil, Russia, India
and Mexico $US10bn each, $US5bn from Turkey, and smaller sums from a
handful of other up-and-coming economies.

IMF managing director Christine Lagarde said 12 more countries offered
money to the fund during the G20 meeting, bringing the total number of
donors to 37.

"Countries large and small have rallied to our call for action, and more
may join. I salute them and their commitment to multilateralism," Ms
Lagarde said.

The announcement brought an end to the mystery of how much the powerful
BRICS countries - Brazil, Russia, India, China and South Africa - would

They held back two months ago when the IMF solicited commitments at its
spring meetings in Washington and only gathered a firm $US340bn.

That was well below the $US500bn IMF economists had said would be an
adequate expansion of its crisis intervention funding, given the
potential of more contagion in the troubled eurozone.

China's contribution was the most keenly awaited. The world's second
largest economy has the largest pile of foreign reserves, $US3.2 trillion.

Its contribution fell below only Japan's $US60bn and Germany's $US54.7bn
but was ahead of France and all other donors.

The largest economy, the US, on the other hand is not contributing
anything, despite its huge voting power on the IMF board.

While Washington has insisted Europe has enough resources to resolve its
problems itself, it is also abundantly clear that the deeply divided US
congress is in no mood, given the economic problems in America, to
contribute rescue funds for others.

The contributions from the BRICS came with warnings that they want to
see changes at the IMF, where their voting power is a fraction of their
power in the global economy, and that the money should not be reserved
for Europe.

They also said the new funding would be tapped only after the IMF's
existing pool of resources - $US380bn - is used.

"This would promote adequate burden-sharing among IMF creditors," they
said, in an apparent dig at Washington for not joining the fund-raising.

(5) Shifting power balance sees China, Japan dig deep to save the West

RICHARD GLUYAS The Australian June 20, 2012 12:00AM

THE arrival of the Asian century has been underscored with news that
China will kick in $US43 billion ($42.4bn) to the International Monetary
Fund's global firewall.

China's commitment, which is the third largest after Japan ($US60bn) and
Germany ($US54.7bn), compares with a weighty contribution from the
mighty US -- zero.

The US is clearly wrestling with its own problems, and a donation to
Europe’s begging bowl would be political poison in an election year.
Even so, the latest commitments to the new $US430bn fund, which were
announced during the G20 summit in Mexico, highlight the anomaly of the
US and Europe controlling key global institutions such as the IMF and
the World Bank, when the centre of economic power is tilting east. ...

(6) China and Japan need to do more than contribute to Europe's 'Begging
Bowl' - John Craig

From: John Craig <john.cpds@gmail.com> Date: 20 June 2012 11:01

Richard Gluyas,

The Australian

Re: Shifting power balance sees China, Japan dig deep to save the West,
The Australia, 20/6/12

Your article suggested that the arrival of the Asian century is
underscored by the funding committed by China and Japan to the IMF
(which is now in effect ‘Europe’s begging bowel’) while the US did not
do so.

However this is just a continuation of the practices that got the world
economy into its current mess. Supressing domestic consumption so as to
generate savings which have to be exported and thus boost demand (and
rising debt levels) in trading partners has been foundational to the
systems of socio-political-economy that have been the basis of economic
miracles in East Asia. Such countries have needed to protect their
poorly developed financial systems, and this resulted in the
international financial imbalances that played a major role in
generating the global financial crisis (eg see Structural
Incompatibility Puts Global Growth at Risk; Understanding East Asia's
Neo-Confucian Systems of Socio-political-economy
<http://cpds.apana.org.au/Teams/Articles/AsiaSustainable.htm>, The Asian
Connection in the Public Debt Problems Facing Developed Economies ; and
GFC Causes).

The G20’s failure to understand / confront East Asia’s cultural problem,
and the West’s futile hope that the financial crisis can be fixed by
countercyclical fiscal and monetary stimulation of domestic demand in
countries which already have large current account deficits and debts,
is one reason that the crisis has continued to get worse (see G20 in
Washington: Waiting for Hell to Freeze Over? and Sustainable World
Growth Requires More than Counter-cyclical Policies).

While the financial problems facing some peripheral economies in Europe
have many causes, in relation the availability of credit their problem
has not been a lack of credit, but rather excessively easy credit (see
Comment on the European Sovereign Debt Crisis). Heavily indebted
economies need to be stimulated by external (rather than by artificially
generated internal) demand.

Thus, if countries such as China and Japan really want to help, they
would reform their financial systems so that they would not be at risk
of crises if they allowed domestic demand to rise, and thus faced
current account deficits. It is in Asia that financial system reform is
most necessary (see Should Fixing the International Financial System
Start in Asia?). If such countries do not want to help solve the global
financial problem, then the rest of the world’s options might be
something along the lines suggested in Getting out of the Economic


John Craig

(7) Flip side of Free Trade: Let us welcome the collapse of the Doha Round

From: Paul de Burgh-Day <pdeburgh@harboursat.com.au> Date: Fri, 18 May
2012 12:56:40 +1000


Bharat Jhun Jhunwala

The Statesman, May 16, 2012

THE WTO treaty was signed in 1995 amidst a wave of expectations. It was
hoped that free trade between countries would lead to all-round
prosperity for both the developed and the developing bloc. All countries
would manufacture and export goods in which they had a competitive
advantage. This, it was expected, would provide cheap goods to consumers
across the world. China would manufacture toys, Germany electrical
equipment and the United States software. This would be a win-win
situation, it was imagined.

Quite the contrary has happened. The year 2008 witnessed the first
economic crisis. The second is unfolding now. These crises are in part
rooted in the free trade advocated by WTO.

The competitive lowering of wages has been the major problem of
globalization. The country that produces goods at the cheapest rate and
gives the lowest wage to the labourer is the winner in the context of
free trade. ‘Labour’ is merely one factor of production. The wage of an
American software programmer is about Rs 8,000 per day, against Rs 1,000
per day for an Indian programmer. Therefore, companies across the world
find it profitable to employ Indian programmers or to outsource their
software activities from India. The American programmer can, however,
save his job if he agrees to accept lower wages. The decline in wages in
the developed countries and the simultaneous increase in the developing
ones are two sides of the same coin. The result has been an equalization
of wages to the global minimum. If, for example, the Philippine
programmers are willing to work at wages less than their Indian
counterparts, then wages in this country will also face a downward
pressure. The hue and cry in America on outsourcing is proof of the fact
that free trade leads to reduction of wages to the global minimum.

Similarly, advances in transport and communication technology have made
it possible for companies like Wal-Mart to buy goods produced through
cheap labour in China. Thus free trade necessarily means lowest wages.

Economic theory tells us that free movement of goods and capital will
lead to each country specializing in what it does best. Bangladesh will
produce more jute and Malaysia more palm oil. This will provide good
quality goods at low prices to consumers across the world and enhance
the welfare of consumers. Global competition would lead to better
products being available to consumers. The improvement in quality of
cars, television sets and computers in India over the past 20 years of
economic reforms confirms this beneficial effect of free trade. The
problem, however, is that the consumer may not have the purchasing power
to buy the expensive items.

Sample this. An imported 25-inch flat screen TV set is available for Rs
5,000. The farmer needs to sell wheat in order to buy the set. But the
cost of wheat production in Australia is much less. Cheaper Australian
wheat has flooded the markets and the farmer in this country is unable
to sell his produce. The Haryana farmer decides to produce jute, but
then realises that production is cheaper in Bangladesh. Likewise,
Malaysia produces cheaper palm oil, Brazil sugar and Vietnam coffee. In
a word, the farmer in India does not have a comparative advantage in any
crop. What is he to do in a free trade regime?

Going by the free trade theory, the Haryana farmer should migrate to
Australia where the climate is more suitable for the production of
wheat. There was less restriction on such migration in the past. People
from the Indus Valley migrated to the Ganges basin and those from Europe
migrated to America. But such freedom to migrate is not part of the
WTO’s free trade model. The poor farmer is hemmed in within his
country’s borders while cheap imports are allowed to come in. The result
is almost certain poverty for all people who do not have a clear and
comparative advantage in terms of certain products, according to global
standards. The theory of free trade falls apart in the absence of free

The solution lies in protectionism. The Haryana farmer can happily
produce his high-cost wheat and buy an expensive TV set if the
Government of India imposes high rates of import duty on wheat that
comes from Australia. Surely, the urban Indian consumer will be deprived
of cheaper wheat and the farmer of the cheaper flat screen; but they
will at least get the expensive ones. In the free trade model they will
get nothing. Thus, protectionism, not free trade, is the route to
people’s welfare in the absence of free and unhindered migration.

Developed countries too would have been better off with protectionism.
They would not have earned profits from the overseas operations of their
multinationals; their consumers would not have obtained cheap imported
goods. Yet, they would have saved their jobs. Toys and garments would be
produced in the United States and provided jobs as well as taxes to the

The present global economic crisis is also, in part, the result of
globalization. Western multinationals have made direct investments in
the developing countries, courtesy globalization. They have started
manufacturing in India and China or are sourcing goods from domestic
companies in these countries. Production is declining in the Western
countries. Production of textiles, for example, has almost entirely
shifted to the developing countries. Accordingly, less taxes are being
paid in the home countries.

Multinationals may repatriate the profits to their headquarters and pay
taxes on them. But the downstream linkages are not being created.
Business enterprises generate secondary and tertiary employment such as
plying taxis, working in hotels, and the construction industry. Their
home governments are being deprived of taxes from these activities. The
tax receipts of Western countries are falling and employment is
declining. Western countries are unable to maintain their past standards
of living. The political leaders are unwilling to disclose this bitter
truth to the people. They are borrowing and trying to maintain the high
standard of living artificially, instead of encouraging their people to
adjust to a lower standard of living. This cannot be sustained just as a
loss-making company cannot survive for long by taking fresh loans.

It is for this reason that Standard and Poor has downgraded the USA. It
would have been in a somewhat better position if it had not advocated
globalization. It could have erected barriers to the entry of cheap
goods from India and China and protected its business to a greater
degree than is now possible.
People’s welfare can only be secured by protectionism in the absence of
free movement of natural persons. Every country can then raise import
tariffs to sustain inadequate domestic production. The people can earn
their bread.

The difficulty with protectionism is that protection is often used by
corrupt governments to extract rent. For example, high import duties on
imported TV can be a smokescreen behind which the government can impose
high taxes on domestic producers. This was exactly the situation in
India before the reforms. The total taxes were as high as 60 to 70 per
cent of the sale price of many commodities. The money was being
appropriated by ministers and bureaucrats and this ill-gotten wealth was
stashed away abroad. The collapse of the Soviet Union and the change in
the economic policies of Communist China are rooted in the rent-seeking
mindset of the party bureaucracies. Free trade prevents extraction of
such rent. But it also deprives people of their livelihood.

The remedy is a protectionist economic policy and efficient governance.
Protection will ensure that people are protected from cheap imports and
can earn their livelihood from inefficient production behind closed
borders. Good governance will ensure that the high tariffs are used to
raise wages and not to extract bureaucratic rents.

The writer is former Professor of Economics, Indian Institute of
Management, Bangalore.

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