Protectionism is no prescription for woes


China Daily
By Chen Deming (China Daily)
April 10, 2009

China has to learn to better handle the relations between internal and foreign trade and between domestic and external demands to overcome the ongoing global economic crisis.

Traditional domestic demand includes investment and consumption, with the former having played a pivotal role in driving the growth of the country’s GDP. But investment can also give rise to inflation and result in an overheated economy because of an expanded credit and ever-growing production capability. Isn’t it common knowledge that large-scale investments are followed by rigid macro-control policies?

The country’s current savings ratio is about 50 percent, which means it still has enough room to boost domestic consumption. But a high savings ratio does not necessarily mean higher purchasing power when it comes to the Chinese. External demand for China means overseas demand for its means of production and consumer goods, which can be realized through trade with other economies.

Investments and exports in general have played a major role in fuelling the country’s economic growth, with consumption playing a less important part. Against the backdrop of shrinking external demand, boosting domestic consumption remains the key to maintaining a steady growth of the national economy. To achieve that, workable steps should be taken to promote a coordinated development between expanding domestic and external demands, which have always been closely related.

First, boosting domestic demand will increase imports and maintain a proportionate balance between global trade and income and payment. This will lay a solid foundation for steady growth of exports. A rise in domestic demand would mean a simultaneous rise in domestic enterprises’ competitiveness in the country as well as abroad. Experience shows that the country’s textile, light industry and home appliance manufacturing sectors, all of which hold large shares of the world market, entered the international trade successfully only after facing fierce competition at home.

Second, steady external demand will help increase employment in the country and ensure workers have a stable source of income. It will increase investment opportunities in the domestic market, too. For instance, the country has witnessed a rapid growth in foreign trade over the past six years with a subsequent fast growth in domestic consumption and investment.

Increasing domestic demand, especially consumption, should serve as a basic guideline in boosting the country’s internal trade. Given that China is still in the early stage of socialism, it should draft a long-term program on how to handle relations between consumption and savings.

Since people have become increasingly rational when it comes to spending, the government should intensify its efforts to increase their income and raise the ratio of consumption in the national economic aggregate. Expenditures on healthcare, pension and other social security schemes should be increased substantially, too. Besides, a well-developed urban and rural service facility network is badly needed to encourage people to spend more.

The country’s degree of dependence on foreign trade – the ratio of foreign trade to GDP – is not as high as many people think it to be. It increased from 12.5 percent in 1980 to 66.2 percent in 2007 but fell to 60.2 percent last year because of the yuan’s revaluation. Despite being much higher than the abut 20 percent of the US and Japan, China’s foreign trade ratio is still lower than the other developing countries’ average of 82 percent. But a higher foreign trade dependency ratio does not necessarily reflect a country’s actual dependence on foreign trade for the sustenance of its economy. Nor does it show the degree of economic risks.

China’s 1.3 billion people and its fast paced industrialization and urbanization are huge potentials for domestic consumption. But only the creation of more jobs and increased incomes can help tap the domestic market potential to the maximum. That’s because the country has 400 million more people than the combined population of all industrialized nations but its goods and service trade is just under 9 percent and 4 percent of the world’s total.

The shrinking international market has created huge difficulties for China’s foreign trade. But the markets from which some developed countries have exited because of the deepening division of labor and the emergence of new markets owing to their financial stimulus packages, too, offer huge commercial opportunities for China’s industries.

To this end, the country should expedite the implementation of its "go out" strategy announced a long time ago, and increase the exports of its products that enjoy a sharp edge in the global market. This will help create a solid base for the country to increase its share in the international market and raise its employment level and domestic demand.

The ongoing global financial crisis has given rise to protectionism worldwide. Since it has a victim of anti-dumping measures for a long time, China should push forward free trade and safeguard multilateral trade rules to overcome the crisis as early as possible. Trade liberalization will not only benefit people across the world, but also help to promote competition. If open trade promotes global economic growth and improves people’s living conditions, protectionism only compromises the interest of the people of the country that practices it. The practice will invite trade reprisals by other countries, too.

The author is Minister of Commerce. The article is a reprint from the latest issue of Qiushi Magazine.

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