Trading with China is a win-win process

The “China problem” is a torment for many clothing and textile manufacturers and producers around the world. Their main beef is that the Chinese tend to produce clothing and textiles so much more cheaply compared to what they themselves are capable of doing. As a result, domestic manufacturers across the globe call for protections such as taxes on Chinese clothing and textiles, or, perhaps in extreme cases, an outright ban on those Chinese goods. SA producers are amongst many struggling to compete with the Chinese and, like others elsewhere, are calling for the institution of myriad protectionist measures to protect ‘fragile’ local industries.

But how does this affect the ordinary consumer, the vast majority of whom benefit from low-priced clothing emanating from China? Any agreement restricting cheaper (be they Chinese or other) goods from coming into the country cannot be in the interests of the millions of SA consumers who live at the low end of the market – individuals who can scarcely afford food and shelter and are extremely sensitive to any changes in price.

Quotas, or safeguards, were put in place to give SA clothing and textile manufacturers a window period in which to become more competitive. But, as evidence in the past has shown, protected industries never become more efficient. Indeed, the protection they are given takes away any incentive they might have had to do so, and the results are persistent appeals for extensions of that protection.

And where does this leave the poor consumer? It means that those who typically benefited from cheaper imports in the past end up paying for the inefficiencies of the protected manufacturers. The last thing government policy should do is heap highly concentrated benefits on a select few at the expense of millions of ordinary South Africans. As Jeremy Warner commented in the Telegraph on 19 March 2010 in describing the reaction of vested interests to the activities of manufacturers, importers and distributors of low-cost goods, “The virtuous find themselves depicted as the villainous. If the argument were not so perverse, it would be laughable”.

As long ago as 1815, David Ricardo introduced the concept of comparative advantage, demonstrating that producers should focus on those goods which they are best at producing. Consider the following hypothetical example, which has been simplified for illustrative purposes. Let’s say a South African worker can produce a drilling machine in half an hour, or a computer in one hour. A Chinese worker can produce a drilling machine in twenty minutes, or a computer in ten minutes (of course these productivity numbers are both fictional and exaggerated). If SA and China do not trade, it takes one and a half hours to produce both a drilling machine and a computer in SA, whereas in China it takes half an hour. If the protectionists get their way then that is where our hypothetical example ends.

If there is free trade, both countries will trade with the other and both will be better off. If the Chinese worker makes two computers in twenty minutes while the South African makes two drilling machines in one hour and then they trade one drilling machine for one computer both are better off than when they started. The Chinese get a drilling machine (without having had to make it) and a computer for twenty minutes of labour (as opposed to half an hour) and the South Africans (without having had to make a computer) also get both goods for one hour of labour (as opposed to ninety minutes).

This mutual exchange is a win-win process. The justification for the trade is to earn foreign exchange with which to purchase goods from foreign producers. In a more complex world drilling machines and computers may not be directly exchanged for one another. SA may sell drilling machines to Botswana who in turn sells diamonds to Japan who uses them to make special machines required for the manufacture of computers, which Japan then sells to the Chinese who make the computers to sell to SA. Countries can only afford imports if they produce exports to pay for them.

If this is in doubt the extreme case may be illustrative. Consider a country that wants to be completely self-sufficient and bans all imports. In this extreme scenario, the export industry will certainly die because there will be no reason to earn foreign exchange to purchase imports. Policies that seek to restrict imports are therefore in complete contradiction to policies that seek to encourage exports. It is for these reasons that trade is the engine of economic growth. One only has to look at the experiences of closed economies versus open economies to see this in practice.

Take a minute to look around. Everything that every consumer buys is the result of the individual efforts of millions of people scattered across the globe. Few goods, if any, are produced in their entirety in one country. Specialisation of labour enriches us all. There should be no artificial barriers restricting or blocking goods or components of a good from any specific economy. Political borders should not be relevant in the economic equation. Consider the following example. As a resident of Durban, I am better off being able to get my wine from Cape Town as opposed to being forced to obtain it from an inefficient producer in Durban – at present no one is trying to limit my consumption of wine from Cape Town. Similarly, why should poor SA consumers be prevented by artificial barriers from obtaining goods they prefer or can better afford because they happen to come from China? Why should they be punished because the Chinese happen to be more efficient producers of clothing? And why should the Chinese be punished because we cannot produce the same goods as efficiently or as cheaply?

It should be regarded as a non-negotiable fundamental right for the poor to access the world’s cheapest essentials. Anyone espousing anything to the contrary should immediately be labelled as exploitative and uncaring. This is not mere rhetoric. Those who lobby for protectionism against essentials purchased by the poor cannot care about them.

Author: Jasson Urbach is an economist at the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article / 30 March 2010