sexta-feira, 26 de dezembro de 2008

The invisible hand vs. the political mind

There is a very important connection between politics and economics. One of the most difficult issues in this area is the job market. Economic gains are not always tied to increased jobs, and it is better to have more citizens employed and less welfare, than a lot of welfare with a lot of unemployed people.

Job protection has been used, in fact, as a major argument for protectionist policies. This is particularly true in job intensive sectors such as textile, steel, or automotive. This is why the GATT excluded textiles from tariff reductions with the Long-term Textile Arrangement of 1962 and the Multi-fiber Arrangement of 1974.

Overall economic gain is rarely the main objective in global decisions, but rather who gets what. Quite often, everyone stands to lose because of some who refuse to make concessions. This is the case of the current Doha round of trade negotiations. The Common Agriculture Policy of the EU has been one of the major impediments to the success of the round, which according to estimates from the World Bank could generate immense wealth if successfully concluded.

Not more than 3 million Europeans farmers profit from the Common Agricultural Policy of the European Union, but they are not concerned about the overall gains of commerce. Their understandable goals, albeit selfish, are to hold on to their not-so-small advantages.

The important lesson from both the GATT and the WTO is that politics will, as well as they should, always exist. However, they should not be allowed to jeopardize the entire trading system as happened in the 1930s.

It seems, therefore, that the problem is not politics, which are legitimate, but rather exaggerated populist protectionism, which can have serious impacts on trade patterns that are detrimental to all.

China has always been a major concern to all relevant trading players. However, China’s entrance to the WTO in 2001 did not force all countries to recognize the Chinese economy as a market economy. A whole series of safeguards were implemented to allow countries to protect their economies from Chinese imports.

In spite of all the problems posed by China’s entry into the WTO, politicians worldwide took advantage of the “Chinese threat” to justify protectionist measures, similar to what happened with Japan in the early 1980s. As it turned out, the voracious Japanese monster eventually lost stamina and stopped devouring the market shares of other countries.

The bottom line is: once China gets richer, its workers will start demanding their rights and things such as 50 dollar salaries will eventually disappear.

The problem will be, rather, how to satisfy the consumption needs of 1.3 billion Chinese who now have much more than 50 dollars to spend, without inflationary risks. The marketplace should be prepared for some avid bidding for commodities, goods, and services. Protectionists should not forget the huge opportunities this represents for big business.

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