Since the global economy hit the skids, everyone has been decrying protectionism, with China the loudest in its criticisms of trade practices. Everyone wants to maximize both their exports to overseas markets as well as domestic purchases of local goods — local products compete against imports of course.

In a world without trade rules, what would be the winning strategy? Put up a wall around your country and only allow exports to cross the border.

In a WTO world, it’s more difficult. Countries essentially have to find devious, non-tariff barriers to trade, to fight against those nasty imports. Favorites include anti-dumping, technical standards, and hygiene rules.

But in a WTO world, you do not want anyone to know (or be able to easily prove) that you are putting up these barriers around your economy. The best-case scenario is to remain squeaky clean from a PR perspective (while maintaining your protectionist policies) so that you can continue to publicly rail against other protectionist countries.

The U.S., EU and China have been playing this game over the past year or so. When push comes to shove, you can always litigate at the WTO against another country’s protectionist measures. However, it’s a good idea to choose your battles carefully. Overuse of the litigation option makes your country look defensive, and possibly petty.

Which leads us to the latest, a fight over commodities and export restrictions. You can be the judge of whether this qualifies as a poor use of the litigation option. My only comment is that the blogger I got this from is, in my opinion, a highly intelligent individual.

[T]he US and EU may bring a WTO case against China over Chinese restrictions on exports of 20 raw materials including tungsten, copper, bauxite, and others. The allegation comes as little surprise given China’s strategy in recent months to grow its stockpiles of raw materials for the stimulus package and future growth.

The market for raw materials should be free and China should aim to reduce its trade barriers to prevent price distortions, but in my opinion, the US and EU should pick their battles more wisely.

For one, China’s demand for natural resources is one of the world’s primary sources of growth and optimism in recent months.  It’s not as if they are hording commodities in a time of limited supply.

There are also far more important issues in the US-China and EU-China trade relationship.  For example, it would be more useful to look at the composition of the Chinese stimulus program and see if they were restricting imports from the US and EU.  This would perhaps open up some of China’s large stimulus to firms outside the country and help balance China’s large trade surplus.  Rail systems, which along with roads and highways are supposed to receive nearly 50% of stimulus funds, could be a major source of demand for European manufactures.

The United States received endless criticism of the “Buy American” provision, but there has been little publicity about protectionism that may be built into other countries’ stimulus packages.  China, in particular, is ripe for hidden protectionism because two thirds of the stimulus will come from bank lending and provincial governments, which are particularly difficult to track by outside entities.

The US and EU should use the allegation that China is restricting exports of commodities as a bargaining chip to bring the Chinese to the table and discuss appropriate levels of government protection and intervention during a severe downturn.  This would do far more than a petty WTO case to resolve the largest problems that face global trade.

This entry was posted on Tuesday, June 16th, 2009 at 10:00 pm and is filed under International Trade, U.S.-China Relations. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.