Cheers to China, for Making It Easier for Its People to Import
The Government of China’s unilateral reduction of tariffs last month on almost 200 consumer products provides further testimony to the fact that the goal of trade is not just to increase exports, but also imports. The Chinese have become tired of being poor people living in an increasingly wealthy nation.
In fact, after years as the world’s biggest exporter, China is on track to becoming the world’s biggest importer over the next few years, according to a paper prepared by two leading economists for the China International Capital Corporation, the country’s first joint venture investment bank.
The tariff reductions, and the shift to a pro-consumer policy, stands in sharp contrast to the protectionist and mercantilist views we are hearing from President Donald Trump and many of his trade advisors. As Simon Lester and Huon Zhu recently pointed out in an article for a Cato Institute publication: “While U.S. trade policy under the Trump administration has become a confusing mix of bluster, posturing, threats, and uncertainty, China has gone in the other direction, at least incrementally by lowering some of its tariffs unilaterally.”
Lest anyone thinks that China’s unilateral tariff reductions is a response to vague threats from Washington, the latest round of tariff reductions is China’s fourth since 2015. What is driving China’s steps toward a more open market is not political pressure from outside the country, but pent-up consumer demand within it – and a recognition of the need to undertake a marked shift in China’s prevailing economic paradigm.
From its recent model based on low-cost manufacturing and massive exports, the Chinese government is looking to stimulate domestic consumption as part of its wider strategy to restructure the economy. The government has made it a priority to achieve this goal, and it has sometimes seemed elusive. While consumption in China did increase last year in absolute terms, it fell as a percentage of GDP. Nevertheless, the growth in consumption demonstrates a desire to turn national economic growth into increased consumer choice.
Chinese consumers have been demonstrating an insatiable demand to do what consumers do when they can afford it – consume. High tariff rates on many foreign goods drove many middle and upper class Chinese consumers to fly overseas to combine holidays with shopping sprees. Some might almost think that high tariffs were actually a policy of the airlines, rather than a policy to pursue national interest.
High tariffs also contributed to the rise of grey markets, in which sellers peddled foreign goods – smuggled in under the tariff radar – at lower rates. Middle-menwent overseas to purchase foreign products, bring them back into China without paying import tariffs, and sell them at lower rates than branded stores.
Instead of undermining domestic producers and workers by enhancing competition from foreign sources, reduced tariffs are likely to encourage more consumption within China’s borders, rather than seeing it seep outside the country’s borders. As reduced tariffs lead to reduced prices, more lower-income Chinese workers will also get a crack at buying more consumer goods. And the reduced tariffs may also provide a significant boost to China’s burgeoning ecommerce sector, which has been growing exponentially since 2010 – and is expected to be larger than the United States, Germany, Japan and the United Kingdom combined by 2020.
Rather than pursue a mercantilist policy focused entirely on driving up exports (and curbing imports), China is looking outward, incrementally making it cheaper and easier for Chinese consumers to shop and spend on foreign products as well as domestic ones. Foreign exporters will no doubt benefit from this strategy, as tariff reductions make it easier to sell into the huge and growing Chinese market. But so will Chinese consumers and producers.
China’s unilateral reduction of tariffs is an illustration of a simple fact: Even if they are not part of a quid pro quo, tariff reductions boost the country making them. In fact, the biggest advantage of free trade is not that it makes it easier to export, it is that it makes it easier to import – thereby enhancing competition and choice, encouraging specialization, increasing scale, and transferring knowledge.