Llewellyn

King

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August 20, 2007

Argentina, and the World, Grapple with the Economic Emergence of China

BUENOS AIRES – The government has increased import tariffs here on a range of goods, in an effort to curb the flood of Chinese imports. Predictably, the move by President Nestor Kirchner has been widely popular with the Argentine business community, but has furrowed the brows of international bankers and economists.

Popular solutions to economic problems are not unknown in Argentina. Generally they have not worked, and sometimes they have led to financial crisis. Nonetheless Kirchner, whose wife, Cristina Fernandez de Kirchner, is hoping to succeed him in the presidency, has taken up arms against China. His detractors say his move to increase import tariffs will impair the country’s five-year growth spurt. No country has recovered quicker or better from disaster than Argentina, which has been able to maintain growth of 8 percent a year. But real growth is hampered by inflation, and Kirchner’s protectionist move is predicted to kick up inflation.

While economists may say that the Argentine response to floods of Chinese goods will be counterproductive, more and more governments feel that they must protect their economies from Chinese competition. This is particularly true of countries, such as Argentina, where there are traditional industries that are identified with their national cultures.

But this is not just a problem for Argentina and small economies. It is a global challenge that is without precedent. The United States, for example, has just realized that 85 percent of its toys are made in China and 50 percent of its seafood is imported from there. This is a staggering market capture – greater than Britain’s world trade dominance in the 19th Century and America’s dominance through much of the last century.

The Chinese phenomenon requires study and more sophisticated responses than Kirchner’s tariffs. The simple answer to the Chinese success is cheap labor. But cheap labor does not explain the encircling grip of the Chinese Dragon. There is cheap labor aplenty in the Philippines, Indonesia, Africa and Latin America.

Perhaps the answers lie in the culture and ethnicity of the Chinese. For millennia they were introspective, passive and remote. None of those who invaded China thought that it had much to offer, or that the Chinese could be mobilized into an economic force. The Japanese, Portuguese, Russians and British found little wealth in China. The British, who had found so much to exploit in India, contented themselves with peddling opium to the Chinese.

The first indications that there might be enormous potential in China can be retrospectively seen in the role of the Chinese community in the economic miracle of Singapore, followed by the explosion of Hong Kong. A sleepy British colony became an economic powerhouse. If little Hong Kong could do that, what would happen in the mainland? The answer is that the world is flooded with Chinese manufacturers.

Next year, Chinese automobiles will hit the United States and western Europe. Soon China will lag only in large commercial aircraft – and that cannot be forever. Yet no economic power is invincible: They rise and they fall.

On Capitol Hill, lawmakers have found a villain: the pegging of the Chinese currency to the dollar. If it were allowed to float, they argue, Chinese imports would go up in price and there would be some equilibrium in world trade. Yet The Economist magazine has calculated that trading freely the yuan would rise only a few percentage points. The magazine’s purchasing power index has indicated that the yuan is not terribly undervalued.

The trouble is that the Chinese are very good at beating us at our own game. In Trenton, N.J., there is a large sign that can be read from passing trains. It says, "What Trenton makes, the world takes." Unfortunately, that is no longer true. What Beijing makes, the world takes – and Beijing makes more and more.

Universal protectionism may not be the answer. American children do not want to do without toys, sushi bars without fish or, for that matter, women without bras. A few years ago the European trade commissioner, Britain’s Peter Mandelson, moved against the importation of bras from China. Unfortunately, he did not do his homework and had not learned that bra manufacturing was in such poor repair in Europe that women needed their uplift from China.

It has become a cliché to say that China is the world’s factory. Like many clichés, it is true.

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