Interesting articles: income and substitution effects of protectionism
- Peterson Institute’s Fred Bergsten and Edwin Truman testify before House of Representatives Budget Committee on why US deficit matters, plus tables with major holders of US debt. A quote: _“Trade policy is not the topic of this hearing, but I would note, before closing, that the creation of US barriers to imports of goods or capital would be an ineffectual and wholly inappropriate response to our trade and current account deficits. As indicated throughout my statement, these large imbalances are a macroeconomic problem that requires macroeconomic (including exchange rate) remedies. It would be particularly counterproductive to discourage inflows of direct investment or any other forms of foreign capital, which we must continue to attract as long as we run current account deficits”.
- Niels Jensen of Absolute Return Partners writes an article in MoneyWeek stating that politicians and ptotectionism are biggest threats to continued global prosperity. A quote: “Protectionism is not the right way forward. Never has been, never will be. The fact that China is guilty of one of the greatest economic crimes of all times is no justification for increased protectionism. As long as the global economy strolls along, as it evidently does at the moment, the cries for increased protection(ism) are no more than distant drums, serving as a reminder of things to come. In a recession the drums will get louder and louder until the pressure becomes too much to bear for our elected politicians and they give in. At that point, we would almost certainly have a nasty bear market on our hands.”
_ I have read many articles about dangers of protectionism, defined as rich countries punishing poor countries for being price competitive. Such protectionism can even lead to global recession. This is “income effect” of protectionism. But many articles forget to notice the “substitution effect” of protectionism. By substitution effect I mean accelerated trade,investment and education links between China (or broader, Asia) and Africa. Over next few years this will not make a big difference, but demographics and Asia quest for knowledge economy implies that Chinafrica is the real globalization story in the long run. So politicians should think of both effects when they ponder trade or investment barriers.