Tuesday, March 27, 2012

A Quick Reminder re Trade Diversion and the Folly of Bilateral Protectionism

I've frequently cautioned that a big flaw in U.S. restrictions on trade with single countries like China is the fact that such bilateral protectionism typically doesn't lead to increased domestic production or employment and instead simply shifts production to other low-cost countries.  From Mark Perry's great Twitter feed comes yet another example of the obvious reality that is trade diversion:
Chinese bike manufacturers are beginning to look at expanding into new markets in Southeast Asia in the face of rising labor costs and restrictive export duties to Europe, said Xiao Yun Huo, vice secretary general of the China Bicycle Association.

The CBA is researching regulations, tariffs, government policies and market information in countries like Malaysia, Indonesia and Vietnam to determine whether it makes sense to shift some production there to remain competitive in today’s fast-changing world, Huo said through a translator during an interview on Thursday in Shanghai.

China is the industry’s leading bike exporter with 55.72 million units shipped outside the country last year at a value of $2.9 billion, according to the CBA. Exports fell 4.2 percent last year. China produced 83.45 million bikes last year, an increase of 2.3 percent.

Manufacturing has already begun shifting inland from China’s coastal cities as labor costs have risen, and now producers are beginning to look overseas to keep prices competitive on low-end mass production.

Although China far dominates other export countries, factories in lower cost locales like India are starting to pick up more business. India’s Hero Cycles recently announced a deal with Wal-mart to produce bikes for the retail giant, and opened a U.S. office to support its expansion. China producers have also been hurt by steep anti-dumping duties to Europe, Huo said. The 48.5 percent duties were extended until 2016 last year, although the EU Commission is reviewing that ruling.

The CBA is also looking to emerging markets in India, Indonesia and Dubai to market China-made bicycles. CBA, which hosts the China Cycle show in Shanghai, organized a new show in Vietnam called Intercycle last year, and is looking at a possible new exhibition in Indonesia, Huo said.
The article above makes clear that the European tariffs and other factors raising Chinese bike manufacturers' costs are causing a shift in production not to Europe but to other low-cost destinations like Vietnam and India.  The lesson, as always, is that for many labor-intensive goods, US efforts to raise costs in China (e.g., demanding a stronger Yuan) or to impose tariffs on Chinese imports will do nothing to increase US jobs.  It will, however, raise prices for those goods in the United States (to the benefit of a few discrete producers and at the expense of all US consumers) and increase production and jobs in Vietnam, India, Indonesia and elsewhere.

Somehow I doubt that's what our protectionist politicians had in mind.


Srikar said...

Scott,another classic example of the paradox of "domestic national interest" - one's domestic producer or one's consumer?

Scott Lincicome said...

Yes, Srikar, but the key difference is that the producers want the government to compel (via tariffs) consumer actions, while consumers simply want the government to leave them alone and let the market work. This distinction between government action and inaction is critical.

Srikar said...

Agreed! The producers are a much stronger lobby, everywhere!