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Old-fashioned free trade is best ‘retaliation’ against China

Article published on European Voice, Vol. 11 No. 23, June 16, 2005.

As the possibility of the EU imposing a protectionist regime on Chinese textiles looms ever larger, it is well to recall that on 26 April, the Chinese trade minister’s spokesman transmitted what seemed 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. » In other words, if Europeans do not buy their shirts, the Chinese will not buy their planes or trains.

The crisis started with the European textiles group, Euratex, which demanded that the European Commission take protective measures against the flood of Chinese exports.
The reasons invoked were that the Chinese invasion threatens jobs in the European textiles industry and will therefore have a negative effect on the overall prosperity of European citizens. This is what Francesco Marchi, business director at Euratex, suggested when he said that « the European clothing and textile industry makes a significant contribution to the gross domestic product of the 25 EU countries. »

At base, protective measures are good for neither Europe nor China. In Europe, people should realise that if Chinese businesses are increasing their market share at the expense of their European rivals, it is because European consumers tend to prefer Chinese textiles, notably because they are much cheaper. It follows that protective measures, by taking that choice away from consumers, go directly against their interests. The revenue the European textile industry would lose has to be earned by other European industries.

On the one hand, by buying cheaper textiles from China, consumers can purchase other goods produced in Europe. This is an additional source of income for other European industries.
On the other hand, and as a last resort, imported Chinese textiles must be paid for trough European exports.

Protectionist measures planned by the Chinese government in response to the pressure of the European Commission will harm the European consumer. We must hope the Chinese authorities will be able to identify the negative effects any retaliation would have on the Chinese population, and not follow the European example of protectionism. This would deprive Chinese consumers of access to goods which they produce less competitively than Europeans.
Even unilateral free trade is beneficial for those practising it. In 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 liberalise the grain trade unilaterally to the benefit of consumers, forcing big landowners to modernize or diversify. The 85 years following this decision corresponded to a tremendous period of prosperity in England.

The leitmotif of Manchester’s Anti-Com Law League 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 the nations. Europeans do not seem to understand this, but we cannot solve the problem of unemployment or promote peace by putting up custom 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.

Aeroplane 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 very 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.

It is a pity that Chinese leaders have accepted the idea of export tariffs but let us hope they will be more enlightened than their European counterparts by drawing back from the temptation of import quotas or tariffs and instead choosing free trade.

Cécile Philippe is director of the Molinari Economic Institute, Brussels. Xavier Méra is an associate researcher at the Molinari Economic Institute.

Cécile Philippe

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