Protectionism: US, China and Brazil

Posted on | mei 18, 2011 | 2 Comments

Is the US the most free-trade nation on earth as it projects itself, while vilifying other countries or economic blocs like the EU? Is China the most protectionist and most guilty of protectionism? Is Brazil engaged in unfair trade practices to strengthen its own industries, or do Brazil’s protectionist measures protect both domestic and foreign multinational corporations?

Emerging from the age of mercantilism, England was the first country in the world to industrialize, hence to have no fear of competition, so it was the first to declare that it favored a free trade regime. Prussia (Germany after unification with the other Germanic states 1871), was always in favor of regional free trade zone integration, but mindful of protecting domestic producers. The US was also protectionist when it was industrializing in the 19th century, as it would have been difficult to do otherwise. Beyond the issue of state protection for domestic producers after the nation is sufficiently strong as to not fear competition, there is the issue of whether it is possible to have a pure ‘free trade’ regime.

Protectionism is when government endeavors to protect domestic producers/services against foreign competition. There are many indirect forms that a government can engage in unfair trade practices, some of which include:

1. tax breaks from the local and central government;
2. guaranteed loans, price supports, product subsidies;
3. high tariffs on foreign products competing with domestic ones;
4. designating foreign products ‘luxury’, thus taxing them at a higher rate because they compete with domestic products;
5. limiting domestic market access through various methods including government-sponsored ‘buy American’ ‘buy German’, etc. campaigns;
6. imposing quotas on imports;
7. reducing taxes on domestic products, claiming that a product has exclusive ‘intellectual rights’ thus constituting a monopoly as a brand;
8. introducing anti-dumping legislation,
9. providing protection/preferential treatment as part of a trading bloc (NAFTA, EU, etc.);
10. undervalued currency; and
11. facilitating domestic products from production to market by providing the infrastructure at taxpayer cost.

The wealthier the nation, the stronger the state fiscal structure, the more it is able to engage in one or more of the above mentioned practices. Of the trillions of dollars that the US has spent in the last three years to strengthen finance capital and stimulate the economy, a good deal of it was given out not to reduce unemployment, but as old fashioned pork barrel political payoffs and to protect US companies that have been weak against foreign competition. While the US has enjoyed fastest trade growth with NAFTA partners Mexico and Canada, those countries see the US as protectionist. However, a ‘trade bloc’ is nothing more or less than a protectionist device for those outside of it, and a device to benefit corporations within it.

In the 1970s, the US made a political decision to help strengthen China in order to trade with the largest potential market on earth and to weaken the USSR at the same time. China under a strong state structure pursued quasi-statist policies, that is to say a regime of government protections in various forms including a cheap currency that helps exports. Forty years later, China is on the road to surpassing the US as the world’s preeminent economy, largely because it has been practicing ‘unfair trade’ argues the US.

US complaints about China include: a) trade dumping; b) undervalued currency; c) copycat cheap products unfairly if not illegally competing with name brands; d) cheap labor and subsidies for companies that are partly state-owned; e) pursuing anti-consumption policies, including limiting consumer demand with low wages, thus affording a huge trade surplus for their economy; f) underselling products such as steel in the US in order to secure market share.

For its part, China has complained that: a) the US keeps its currency undervalued and it is China taking the hit because it owns a large part of the US debt; b) the US has been providing various ‘trade relief measures’ to its exporters in violation of WTO rules; c) ‘buy American’ campaign is a form of protectionism; d) ‘stimulus’ packages by government to private sector constitutes a violation of fair trade.

These complaints against the US are the same as the EU has leveled. Given that the EU is America’s largest trading partner with trade flows of $2.3 billion per day, the EU has more in common with China. For example, the EU agrees with China about US stimulus package and buy American is a form of protectionism that costs EU billions of dollars in US government contracts.

Similar complaint about unfair trade have surfaced between US and Brazil, the second largest economy in the Western Hemisphere. There is a perception that Brazil is protectionist, that is more so than let us say the US that projects the image of a free trade nation. However, and the record shows that Brazil has fewer foreign trade violations than the US. For the last ten years, Brazil has been protesting through the World Trade Organization that the US not ‘dump’ cotton that is heavily subsidized, among other products. On four separate occasions the WTO sided with Brazil against the US that has been engaged in such unfair trade practices for the past fifty years in relationship to Latin America. The WTO gave Brazil the green light to retaliate against the US with tariffs because of the discriminatory subsidies.

Without tariffs, Brazil would not be able to develop the domestic industries, most of which are foreign-owned. For example, Brazil recently imposed tariffs on select glass goods from China, Argentina and Indonesia to prevent “dumping”. For example, one of the world’s largest glass multinationals, Japan-based AGC Group, has invested heavily in Brazil – expecting sales to surpass $23 billion by the end of the decade – and it is not in its interest to have cheap imports dumped in that market.

The average tariff in Latin America is 12.2%, while Brazil stands at 12.3%, lower than Peru and about the same as Argentina and Venezuela. In comparison to the U.S. that has historically found multiple methods to practice dumping and engage in unfair trade practices, Brazil looks fairly good. For example, the US slapped a tariff of 54 cents per gallon on ethanol, solely intended to protect US producers, especially Archers Daniels Midland company. Trying to circumvent WTO rules, the U.S. unilaterally decided that ethanol is a product outside the scope of WTO rules. In 2008, Brazil challenged the US before the WTO.

In the world in which we live today made up of formal or informal regional economic blocs, where the state is indispensable to supporting the capitalist system to prevent its collapse, where it is essential to support certain industries deemed of ‘national importance’ from foreign competition, where there are many ways to engage in protectionism, ‘free trade ‘ is a theory and not practice; it has been so since the outbreak of WWI. The question is not free trade, but fair trade and ‘fairness’ is limited to the strongest players (corporations and countries) in the global market.

AUTHOR: Jon Kofas
URL: http://jonkofas.blogspot.com
E-MAIL: jonkofas [at] yahoo.com

Comments

2 Responses to “Protectionism: US, China and Brazil”

  1. D. Fasone
    mei 18th, 2011 @ 16:45

    A very well written and balanced article. Unfortunately no solutions are offered…as there may be none…but understanding trade arguments is very much helped. A smart take on trade.

  2. Martin Frazer
    augustus 13th, 2012 @ 05:18

    Are you really ignorant of the Chinese State Owned Enterprises, and the advantages they give China? Really?

    http://www.gov.cn/misc/2005-10/21/content_80894.htm

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