ECONOMYNEXT – Sri Lanka’s Prime Minister Ranil Wickremesinghe has met Chinese President Xi Jinping at Davos, who has slammed import protectionism as "locking oneself in a dark room", emerging as a new champion of trade freedom of the poor, as the United States is getting mired in economic nationalism.
Xi likened raising import duties to ‘protect’ domestic businessmen from competition as "locking oneself in a dark room" and cutting off all "light and air", at the World Economic Forum in Davos.
His comments come as newly elected US president Donald Trump’s USA has promised to up import duties to raise living costs of less-affluent Americans in particular.
He has also threatened to punish US businesses that invest in poorer countries with lower labour costs, effectively declaring war on firms seeking to lower costs for consumers and giving jobs to poorer humans.
"No one will emerge as a winner in a trade war," Xi said in Davos.
President Xi met Prime Minister Ranil Wickremesinghe before the opening of the Davos forum along with Bangladesh PM Hasina Wajid, Serbian PM Aleksandar VuÄić and Swiss President Doris Leuthard.
China’s championing of free trade has come at a time when Donald Trump has threatened to penalse firms that invest in poorer countries like Mexico and has virtually scrapped the Transpacific Partnership, an ambitious US-led multilateral trade deal.
The TPP could have created a large trading area incorporating Asia, South and North America, with freer trade and strong property rights for citizens and investors.
A defining feature of true capitalists is that they will give a job to the most hungry, signalled by their willingness to work at the lower salary, regardless of their nationality – including to so-called illegal immigrants.
Before the European nation-state came up with nationalist citizenship, visas and work permits, people migrated freely in search of jobs. The US itself was a centre of economic opportunity of migration for centuries.
Trump’s economic nationalism on trade is also out of sync with the view of the Republican Party he was elected through. Analysts have warned that the US will leave a vacuum in the international economic order that others will fill.
Prophetic
"If the United States is not going to exercise leadership and not set that architecture, then what we are doing is – indirectly at least – allowing other parties to do it," Frank Lavin, a longstanding Republican operative and trade negotiator, warned in a podcast with Advocata Institute, a free market think tank last November.
"And some might do it with us in mind and others might do it to exclude us from that pattern. So I think the United State is worse off and the region is worse off without US trade leadership."
In his hour-long speech at Davos, Xi seemed to be signalling that China is ready for the challenge. China is already investing in countries with cheaper labour, though not all of the firms are capitalist.
Free trade, championed by Western classical liberals from the 16th century, is the bedrock of capitalism.
Free trade forces producers and business owners to bow down to consumers – particularly the so-called mass market, less-affluent and compete with each other to provide cheaper and better products and services.
Consumer Sovereignty
In a free trading nation, the consumer is sovereign and businesses cannot corner and exploit them with import duty protection colluding with the state to restrict and control what goods they buy.
As a result, businessmen are forced to become capitalists and go on their knees before the consumer or go bust. Any ‘monopolies’ that emerges in free trade is due to efficiency and competition.
The defining feature of Mercantilism, however, was state- or Monarch-backed monopolies and trade restrictions. Firms like the Dutch East India companies brought Mercantilism to Asia.
Protectionism re-emerged in Europe from the mid-1800s with the rise of economic and ethnic nationalism in Eastern Europe. Germany, through its German Historical Economics, became a hotbed of economic nationalism and trade controls, which eventually led to Nazism.
China itself has been accused of Mercantilism, with state-backed firms pushing out and the banking system in particular being state controlled and restricted for foreign investment. As a result, mal-investment of peoples’ savings in bad loans – including in state enterprises – is a problem in China.
The American Chamber of Commerce, made up of businesses that had invested in China said there were still ‘discriminatory barriers’ and they can increase investment if restrictions were imposed.
China also provides Exim finance at the expense of Chinese consumers and taxpayers. (Colombo/Jan19/2016 – Update III)