Protection Promotes Transition

The global trade protectionism once again raised its head in September. China unfortunately became one of its victims. From the USA to Germany, many countries launched the anti-dumping probes into the made-in-China products. China should not only blame the countries advocating protectionism, but also think of changing its own economic structure to reduce the influence of trade protectionism as much as possible.

The US government began to impose punitive customs duty on the tires from China according to the “special safeguard measures” on September 11, 2009. This is the most representative case of the surging trade protectionism.

The dispute on Sino-US tire trade seems to be an isolated case: the US government declared that limitation will be exerted on the tires from China. The duration will be 3 years. On the basis of current 4% customs duty, 35% tariff will be imposed on the tires for passenger cars and light trucks in the first year; the duty will be decreased to 30% and 25% in the second and third years.

But there are a lot of implications behind this case. This means the urgent period to deal with the financial crisis is gone. The main economic entities shifted their attention from working together to fight the crisis to how to recover its economy. Therefore, in the period when the global economy grows at a slow pace, the popularity of the trade protectionism, which undoubtedly can bring some negative influence upon the recovery of China’s economy, is within people’s expectation. For China, the fourth quarter of 2009 and the first half of 2010 will be the golden period for the economic structure adjustment. The Chinese government can implement more active employment and income policies to expand the domestic demand to change the current situation that the economic recovery depends on the financial and credit investment too much.

Trade Protectionism Pricks up the Deflation in China

The surging trade protectionism gradually squeezed the space for economic recovery of China against the current economic structure. Judged from the output data in the first eight months of 2009, a lot of industries are haunted by the surplus production capacity, making China face a middle-term deflation threat.

Theoretically, the quantity theory of money emphasizes on the corresponding relationship between the money supply and inflation. In August, the balance of broad-money supply (M2) was 57.67 trillion yuan (USD 8.45 trillion), up 28.53% from last year. Accompanying it should be a comparatively serious inflation, or at least an inflation forecast. However, the quantity theory of money accentuates the condition that “the output can not be changed in a short time”, which China’s output data in the first three quarters of 2009 doesn’t match. From January to August the total exports amount decreased by 22.2% year on year. In the same period the added value of upscale industry increased by 8.1%. Therefore, the expansion of production capacity is much faster than broad money. According to the quantity theory of money, if the flow rate of currency is not changed, the inflation ratio is the increase of money supply minus the increase of output. The result is negative, which means that China now is facing the stress of deflation.

The conclusion based on the theories is: if the trade protectionism still prevails, it will be less and less likely for China to see the fast growth of export. Then China will have to increase the investment and credit to maintain the economic growth rate. Actually, trade protectionism can form a blow to the engine for the global economic recovery. According to the July edition World Economy Outlook from the IMF, the global economic growth rate in 2009 might be -1.4%, of which the economic growth rate of developed countries is -3.8% and the one of emerging and developing countries is 1.5%. Against the situation of prevalence of trade protectionism, the developing countries including China suffer more serious blows and their contribution to the global economic recovery is also lowered.

For the problems of the Chinese industrial structure, the historical experience told us that “the industry can be said to be good when the light industry is good”. At the initial stage of each economic boon period, the light industry is faster than the heavy industry. But presently, the heavy industry in China is developing at a faster pace. In August the added value of heavy industry in China increased by 13.2% from last year while the light industry only saw a 9.8% year-on-year growth or 0.6 percentage growth over July. From the view of production capacity, the domestic consumption went up by 15%; the export of light industry products fell by 15%. The unbalanced domestic and foreign demand can not support the fast development of the light industry. Therefore, the Chinese government has to increase the investment and credit for the capital intensive heavy industry. The domestic demand for the heavy industry demand can be increased though the guidance of active policies.

Another problem is also generated from the investment increase, which is the dependence on the middle- and long-term credit loans. In August, the amount of newly-added short-term credit was 50.9 billion yuan (USD 7.46 billion); the middle- and long-term credit loans saw 367.5 billion yuan (USD 53.84 billion) putting into the market. Previously the general forecast about the added amount of credit loans in August was 270 billion to 320 billion yuan (USD 39.55 billion to 46.88 billion). But the forecast was far from the actual amount. The core problem is the sharp contradiction between the slow growing foreign demand and the urgency in pulling the economic development. The bindings from the capital adequacy rate and the projects’ self-owned capital make it quite unlikely to continue the trend of crazy increase in credit amount in the year of 2010. Therefore, the pulling force of credit loans to the economy will not last long.

Structure Adjustment Focuses on Improving Domestic Consumption

Right now the negative influence of the trade protectionism on China has not yet come out. But the Chinese government must be aware of the coming danger and place less hope on the recovery of foreign demand. The best and safest way to recover the economy is to encourage the development of domestic consumption. After the financial crisis, every country will make use of trade protectionism to leave space for their domestic industries’ recovery.

China must get rid of the reliance on the foreign demand and give up the method of using investment increase to offset the decrease of GDP caused by decreased export. To encourage consumption is the only way.

One of the problems that need to be solved is how to change the situation that the economic growth can not fully drive the employment. In the first three quarters of 2009, the unemployment ratio in the urban areas of China was always around 4.3%, which was different from the increasing economic growth rate. Therefore, methods about employment are necessary. According to the data from the National Bureau of Statistics, in the second quarter of 2009 there were 150.97 million migrant workers in China, 3.78 million more than the previous quarter. The number of unemployed migrant workers was 4.20 million. More than 66.7% of the migrant workers worked in East China. That means the Chinese economic recovery should depend on the eastern area. In addition, keeping the 8% economic growth rate is not the real objective, which should be to increase the employment ratio and the income of the residents.

The experts gave out a suggestion, which is to change the investment strategies which focus on the heavy industry and put more investment into the small- and medium-sized enterprises (SMEs) or loosen the restrictions on the credit loans for them. That’s because many SMEs play the main role in the development of light industry in China. Besides, these SMEs can help a lot to solve the problem of unemployment. Apart from the increase in investment and credit loans, the tax reduction is also an effective way for the SMEs to realize the resurrection.