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“Buy China” is Bad for China

June 20, 2009

Just a few months after rightly lambasting the United States for its ill-conceived “Buy America” initiative, China’s leaders announced last week that they are adopting an almost identical directive, designed to ensure that domestic stimulus projects use only Chinese-made goods.    Foreign companies are crying foul, of course, but the new “Buy China” policy is bad for China as well.

It is understandable why, on both sides, politicians feel tempted to enact “buy local” rules.  When you use taxpayers’ money to boost the economy, you want the benefits to go to your own citizens who are footing the bill.  But such measures can be extremely short-sighted, especially for a developing, export-driven economy like China’s.

China’s economy currently depends on exports, which means it depends on free trade.  Until now, China has wisely promoted its own interests by staking out the moral high ground on free trade, and criticizing protectionist moves by others.  “Buy China” undermines this stand.

Domestic companies will always have an advantage in government bidding, anywhere in the world.  So the amount of business foreign companies stand to lose is probably less than they might like to imagine.  But for China’s top planning agency, the National Development and Reform Commission (NDRC) to adopt an open policy of protectionism sends a chilling signal to its global trading partners that endangers far more than the profits from any particular business deal.

Let’s be clear:  stimulus is only a band-aid.  Stimulus will not save China’s economy, only recovery can.  And that recovery, at least in the short-term, depends on a revival of foreign demand for Chinese exports.  A “stimulus” that wrecks export demand by provoking protectionist retaliation from other countries does much more harm than good.

But there are two other reasons why “Buy China” is bad for China, that have nothing to do with foreign reaction and outrage.  The first is that China needs domestic competition.  Many Chinese companies aspire to develop into global players in coming years.  To successfully do so, they face a steep learning curve.  Although they may not always appreciate it, Chinese companies benefit immeasurably from being forced to compete with top global players in the Chinese marketplace.  The lessons they learn, the improvements they are forced to make, are vital to their future success.

For many decades, India protected its leading companies from foreign competition.  As long as that policy continued, these supposed “champions” became weaker, never mastering the skills they needed to compete effectively in the global economy.  China must not repeat this mistake.

The second reason is that China actually needs imports.  Over the past few years, China’s economy has piled up nearly US$2 trillion in foreign currency reserves, mainly by exporting more than it imports.  This sum represents wealth earned by Chinese workers that they currently are not able to enjoy.  As things currently stand, this money cannot be productively invested and is exposed to exchange rate losses.  This imbalance in world trade is not sustainable, and is not to China’s advantage.  A solution will require the Chinese either to invest more abroad, or to import more foreign goods and finally enjoy a higher living standard commensurate with what they sell to the rest of the world.  Setting up new barriers to imports only delays this adjustment and runs counter to China’s true economic interests.

The U.S. Congress was wrong to try to impose “Buy America” regulations, and China was right in calling them on it.  “Buy America” wasn’t just bad for China, it was bad for America too.  Now China, seduced by a similar siren song, is making the same mistake.  Its friends need to step up and say so.

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