If you’re an export-heavy economy dependent on selling cheap goods to the rest of the world, what do you do when global demand wanes? Make your goods even cheaper. Of course, China can’t easily wring costs out of its margin-thin factories, but with all the cash its built up, it can subsidise its exporters — allowing them to lower costs and still turn a buck.
The New York Times recently reported on Chinese policy changes in this regard:
State banks are being directed to lend more to them, particularly to small and medium-size exporters. Government research funds are being set up. The head of the government of Hong Kong, Donald Tsang, plans to seek legislative approval by late January for the government to guarantee banks’ issuance of $12.9 billion worth of letters of credit for exports.Particularly noteworthy have been the Chinese government’s steps to help labour-intensive sectors like garment production, one of the industries China has been trying to move away from in an effort to climb the ladder of economic development with more skilled work that pays higher wages. But now China has become reluctant to yield the bottom rungs of the ladder to countries with even lower wages, like Vietnam, Indonesia and Bangladesh.
Fighting for the bottom rung against the likes of Vietnam, Indonesia and Bangladesh suggests those countries — to the extent that they’re able — will be forced to fllow suit. In other words, 2009 could be a year of trade wars and protectionism.
Jason Busch, an expert on sourcing raw materials, opines:
I look at this whole relationship between the government, banks, workers and companies and it looks like the legitimization of a government-sponsored scheme to keep workers from rioting. So much for capitalist China! But given what’s happening over here, perhaps I should not be so critical. And we could all use China to force producers and distributors here to drop their prices even further. After all, nothing cures low prices like low prices — provided there’s at least some demand in the equation.
How this plays out depends on what you think the response will be in the US congress? If we see government-subsidized cheap goods as the benefit they are — cheap goods! — then this doesn’t have to be so bad. If on the other hand, domestic firms succeeding in pressing their agenda for tarrifs and protectionism, it could be a real disaster. Fortunately, there are plenty of American firms that would welcome cheaper inputs so there should be a counterveiling political effort.