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Protectionist retreat no remedy for trade crises

By Ding Yifan (China Daily)
Updated: 2008-08-05 10:48

Over a period of time recently, there have been some criticisms about economic globalization from developed countries. Some hold the view that globalization has caused social injustice and said it is incapable of treating global issues. Some claim that the rocketing prices of world energy and raw materials would put globalization at the risk of breakdown.

Some developed countries complain that globalization has benefited people in newly industrialized nations only while plunging some developed ones into poverty.

Such a judgment is partial. Globalization has caused some developed countries to transfer part of production lines of their enterprises to less developed ones, thus increasing the profits of these enterprises and promoting the development of their domestic capital market.

The import of some low-priced products from developing countries also helped create a "golden period" in developed ones in the 1990s, during which these countries witnessed "high growth and low inflation". A lot of luxury commodities they have imported from economically underdeveloped nations at low prices have also benefited large sections of low-income consumers back in their countries.

As a typical characteristic of globalization, liberalization of international trade is seen by some people in developed nations as benefiting newly industrialized ones and sacrificing the interests of the old industrialized ones. They said the growth in trade with these newly industrialized nations, which enjoy the advantage of low labor costs, has aggravated inequality in their own countries.

This conclusion runs counter to facts, because it does not elaborate what factors underlie the growth of international trade and what kind of contribution international trade makes to global economy. International trade is not a charity offered by developed countries to developing ones; nor is for the benefit of low-salary countries only. One of the advantages enjoyed by developing countries is the lower labor cost, which is exactly the main factor that attracts some enterprises in developed countries to come to invest there. It is exactly this frequent trade among these enterprises that has contributed a lot to international trade and also promoted the dramatic increase of their own economic profits.

It is now a common consensus in the economic circles that international trade contributes a lot to the growth of the world economy. As an emerging industrial country, China is not only a large exporter but also a large importer. Its imports and exports have been an important factor that helps promote economic growth of a large number of countries in the world, developed or developing ones.

Also, some people in developed countries attribute deteriorating global inflation, and the rocketing prices of crude oil, grain and other primary products to newly industrialized countries. They blame the rapidly growing demand in these countries had led productions to fail to meet demands, thus pushing up the prices of global commodities.

In fact, the participation of newly industrialized nations in the global market has fueled a rapid economic growth worldwide for a long time. Their participation, however, did not cause a drastic rise in the prices of energy and raw materials across the world in the 1990s. The reason for that is that the US and the European countries had a booming stock market during that period, which absorbed a large quantity of fund. With the bursting of the stock market bubble in the US in the early 21st century, the US government began to lower down the interest rate by a large margin and injected a lot of fluidity into the market to rescue the endangered stock market. Subsequently, the futures prices of energy and raw materials began to skyrocket. The situation further deteriorated as the bubble in the US property market began to burst in the summer of last year. The Federal Reserve began to inject a large sum of fund into the market once again in an attempt to rescue US financial organs from bankruptcy. As a result of this measure, the futures prices of bulk commodities in the world market started to skyrocket out of control.

It is the US monetary policy that has caused this round of price crisis of global bulk commodities, and its continuing deterioration will make globalization difficult to carry forward.

Globalization started from developed countries and has been a product of global economic liberalization in which developing countries were persuaded to participate. Due to mounting doubts from the original advocates of globalization, the process is now at the risk of abortion once again. However, historical facts tell us that any kind of exit from the process or resorting to trade protectionism is not a good solution to trade disputes.

Any adjustment of domestic policies only by developing countries is not enough to maintain a steady economy in the world and prevent globalization from creating new global crises. To better deal with these challenges, developed countries should also make corresponding policy changes.

The author is a researcher with the Development Research Center of the State Council.