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Trade Wars: Revenge of the Tariff

Article published on TCS on June 1st, 2005.

On April 26, China’s trade ministry spokesman transmitted an unambiguous message: « China hopes that Europe is able to identify the negative effects that limiting textile products would have on bilateral economic and trade relations. » Writing in Le Figaro magazine, Christophe Doré rephrases this very clearly: « If you do not buy our shirts, we will not buy your planes or your trains! »

But I would counter that with the hope that China is sensitive to the negative effects any retaliation would have on its population, and that it will not follow the European example of protectionism. Why? Because free trade – even when unilateral – is beneficial for those who practice it. Protectionist measures planned by the European Commission will do enough harm without the Chinese having to be deprived, in turn, of access to goods which they produce less competitively than Europeans.

By imposing retaliatory tariffs, one mainly harms oneself, in the sense that custom tariffs harm primarily the inhabitants of protectionist countries. The English understood this very well when in 1846 they decided to liberalize the grain trade unilaterally to the benefit of consumers, forcing big landowners to modernize or diversify. The 85 years after this decision corresponded to a tremendous period of prosperity in England.

The English leitmotif was to increase industrial opportunities, raise employment, lower the price of bread, make agriculture and industry more efficient thanks to competition, and promote peace among nations. Europeans do not seem to understand this nowadays, that we cannot solve the problem of unemployment or promote peace by raising customs tariffs.

Import quotas lead to a decrease in trade, exports and imports alike. If the Chinese government decides to limit Airbus imports, or simply to put a stop to them, air travel in China will become more expensive. Extra resources then invested in the aeronautical sector will be resources that cannot be invested in other sectors which are comparatively more productive and which create more jobs.

Airplane producers, without a doubt, would be delighted to see this happen, because it would allow them to protect themselves against competition. The losers would be consumers having to pay more to travel, and producers in other sectors losing markets.

Protectionist measures are always seductive because their effects are instantly visible: they maintain a certain number of jobs, or cause a decrease in sales in an industry that one may want to punish. But it must be remembered that these are not the only effects; there are also all those jobs that are never created and those needs that are never met. Let us hope the Chinese leaders will be more enlightened than their European counterparts by drawing back from the temptation of protectionism and choosing free trade.

The author is the Director of the Molinari Economic Institute

Cécile Philippe

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