Locke barking up the wrong tree in Beijing
17 May 2010
In 1793 Lord George Macartney travelled from London to Beijing in an attempt to persuade the Chinese authorities to open their domestic market to imports of British goods.
His embassy failed, and he returned to London the following year bearing a letter from the Emperor Qianlong to George III informing the British king that “we possess all things … and have no use for your country’s manufactures.”
This week US commerce secretary Gary Locke heads to Beijing on a similar mission, hoping to wrest greater access to China’s markets for US-made goods.
He is likely to return home as disappointed as Macartney.
Part of the reason Chinese officials won’t make meaningful concessions is that they doubt Washington’s willingness to reciprocate.
In recent months US businessmen have howled with outrage over rules from Beijing requiring government-backed economic stimulus projects to buy only from Chinese-owned suppliers.
Among the loudest protestors have been foreign manufacturers of wind turbines, who complain they have been excluded from lucrative deals to equip the new wind farms springing up in China’s western provinces.
But to Beijing their indignation smacks of hypocrisy. In March a group of US senators tabled legislation denying federal stimulus funds to green energy projects buying foreign-made equipment.
Yet even if US politicians were to practise at home the free trade ideologies they so ardently preach abroad, it is still doubtful whether Locke would make much headway in his attempts to prise open China’s domestic markets.
That’s because Chinese officials nurse an abiding scepticism about the merits of neo-liberal economic orthodoxy.
They have a point. For decades the world’s rich countries and the supra-national institutions they dominate, the International Monetary Fund and the World Bank, have advocated a consistent set of policy prescriptions. As the only sure path to prosperity, developing economies should liberalise trade, open up to foreign investment and reduce the role of the government in business by cutting subsidies and privatising state-owned banks and manufacturers.
Yet as Chinese officials are well aware, history teaches that for developing economies protectionism can pay.
Consider Britain and America, widely considered the champions of free trade. In the 18th and 19th Centuries Britain achieved its industrial dominance thanks largely to legislation passed in 1721 by prime minister Robert Walpole which slapped tariffs of 50 per cent or more on imports of manufactured goods, while scrapping import duties on raw materials and providing subsidies for export manufacturers. Only when Britain had reached economic super-power status in the mid-19th Century did it embrace free-trade.
Similarly, the development of the US economy in the late 19th and early 20th Centuries took place behind a wall of trade barriers that earned America the title of the world’s most protectionist economy. Full liberalisation only followed the second world war.
More recently in Asia, Japan’s rapid growth in the 1960s was achieved thanks largely to the state’s direction of resources into nascent manufacturing industries which benefited handsomely from a protected home market and generous export incentives.
And perhaps most spectacularly of all, South Korea transformed itself from an economy whose living standards at the beginning of the 1960s ranked on a par with newly independent African states like Nigeria into a fully fledged member of the Organisation for Economic Co-operation and Development, the rich-countries’ club. The policies it employed were familiar. The government directed investment into heavy industries like steel, ship-building and car-making, promoting their development with subsidies and shutting out competitors with tariff barriers. Imports were restricted to raw materials and capital goods necessary for boosting productivity, with controls only relaxed once Korean industry was able to hold its own against international competition.
As Cambridge University economist Ha-joon Chang explained in his 2007 book Bad Samaritans, “practically all of today’s developed countries, including Britain and the US, the supposed homes of the free market and free trade, have become rich on the basis of policy recipes that go against neo-liberal economics.”
It’s a lesson Chinese officials have taken to heart. Although they may pay lip service to the benefits of an open market, deep down they regard US advocacy of free trade as entirely self-interested: an attempt, now that America has scaled the heights of economic supremacy, to kick away the ladder behind it so that none can follow.
As a result, China will continue to protect its developing industries. Although it has emerged as a major importer (see the first chart), that growth has been concentrated mainly in raw materials and capital goods. As the second chart shows, the share of manufactured goods (excluding capital goods) in total imports has been declining for years.
Locke’s mission won’t succeed in changing that trend.