The concept of the "new protectionism"

Depression, recession, L-crisis, W-crisis… You will hear much explanations on the problems of the world economy. And all they are not true. Because in fact there is no any problems in much and important regions –like China, India and Brazil. In these countries there is neither a depression, nor a recession. In fact these countries mark an impressive growth. So while in Western countries and Japan economists are wondering what happens, in China economists are enjoying to comment only good news. What happens?

The answer is relatively simple. It is not a crisis of a standard type – not even the most bad crisis of this type – the depression. It is something else - we can call it a "process of relocation". In fact the economy is not going down. It is just moving from one place to another. So in the old place we see going down and in the new place we see going up.

The problem is that in an uncontrollable way the world has entered in an extreme globalization process that is to destroy entirely the economies of developed countries. The reason is very simple – the labor cost advantage of the poorer economies. It is obvious that step by step in an accelerating speed the business and real production is moving to the poorer regions (mainly China). So with less economy developed countries are losing jobs, profits and tax-income.

There is much pressure to Western governments to cut spending and implement austerity measures. But we must be honest – the problem is not only up to government spending. Yes it is a real problem – it is too high, and the overall regulation of business is too high. But this is not the only problem.

Even if we remove the government and all taxes and regulations, even then the business leak to China will continue. Because of the labor cost. Chinese workers are about 10 times and more cheaper than the French or the Spanish workers. So even if we accept and implement the “wild capitalism” concept in Western countries, this will not be enough. The labor cost competition of China will still beat us.

Injecting such type of factor in well balanced before that Western economy will simply destroy it. For corporations is profitable to move the real production to China and use the Western countries only as a market. But when all corporations do the same, the market simply collapses and disappears. Because the market – this is the income of the workers in economy. When all jobs are in China, the people in Western countries are jobless and have no income. No income, no market… No taxes…

The process is unstoppable. Even if a corporation decides not to move its production to China, it will be pressed to do this. When competitors bring to the market cheaper products, the company will have no choice that to follow them. The same is the result of the government efforts to keep jobs. When a company announces its plans to close a factory it starts a political lobbying process of stopping it. Ministers are meeting with workers and with the management and are trying to stop the closing. But all this is a hopeless effort. In the best case it can only win some time. At the end, the factory will be anyway closed, because with keeping it the company is not competitive.

So the crisis is not only in government expenses. It is in the fleeing economy.

In last 50 years the Western world has created an exceptional economy of welfare, based on its internal market. The big salaries of EU came from the EU market and not from export. The big salaries of USA came from the USA market, and not from export. Being completely ruined during the WW2, Europe succeeded in rebuilding up its economy by developing its own internal market. And based on this economy, some countries succeeded in building a heavy social infrastructure. It is true to say that this was a big economic success. May be an economic miracle.

But in last 20-25 years this well balanced system was hit by the cheap labor competition of China. The politics were not prepared to react on the aggressive Chinese expansion. The international legal structure was to stimulate the free trade, with the idea that in the trade will participate mostly the developed countries with equal living standard and labor cost. This free trade would be beneficial for all.

But with China with its cheap labor, no social costs, and sometimes even – with slave labor, The West has found a dangerous economic enemy. For 20 years China has ruthlessly extracted factories, jobs and living standard from Western markets. It did not develop its own market. It just used and acquired other's markets.

Theoretically the new balance - this time a global one will be reached when salaries in old and new economies become equal. I.e. The West can have back its competitiveness if lowers the salaries down to the level of China.

Obviously this is a crazy idea. This means decades of efforts of 2-3 generations to be sacrificed in the name of developing China. Exactly this happens now and this is the main reason for our problems. We are sacrificing our living standard to help China grow faster. This situation marks a fundamental question of what economy is. Is it just a scientific laboratory to test different ideas and find ideal decisions? Or it is a construction, created to make the life of people better? I.e. do we have to sacrifice everything in the name of higher competitiveness or we have to save the reached level of life-quality?

I think the second is the better choice. The economy is a complex system that unites the efforts, labor and knowledge of different people to give these same people good life and prosperity. I.e. the economy is a system that makes our life good. So if this system is attacked by someone, it will be a wise decision to defend it. The economy must be defended from any factor that ruins it and breaks its integrity. It is clear that the cheap-labor competition attacks the system and destroys it. The system can be reestablished only on much lower level - when our labor also becomes cheaper. But from our point of view this means going back a few decades. I.e. we will have to repeat the building of the economy, based on the new internal market, that this time includes also China.

Do you think this is wise? And what will happen even if we do this? Will we have to repeat then for the third time, because out of China there are another cheap-labor countries?

I don't think this is wise. I think we must restart the protectionism. A "new protectionism" era is good to be started to save the already built developed economies and reestablish their integrity. I think several closed economic zones (EU, USA, Asia) must be created that include countries with almost equal living standard and income level. And all this zones will continue developing, based on their internal markets. When poorer zones become richer they will be added to another zone.

For the most speedy growth I would suggest a "wild capitalism" rules inside every zone. But well defended behind duty and tax laws. Wild capitalism inside, a Great Wall outside. And a development based on internal competition.

This is much better solution than the current chaotic globalization that will destroy the world before rebuilding it. Lowering the living standard will lead to civil unrest and can provoke even revolutions is some countries. The stability and the peace will be lost, because the lowering of income is so big that it is absolutely unacceptable. Free trade is a good idea, but only between equal as income areas. Otherwise the process of inevitable making the incomes equal is leading to a destruction.

To become an equal to ours market (so we can sell goods and services there) China needs decades. To reach our living standard it must have a GDP of $50 billion. Even with very high levels of growth of 10% yearly, decades will be needed to reach this. In the meantime the economies of West will be entirely destroyed and people will become an angry crowd.

And at the end it must be said that the "new protectionism" concept is not anti-China concept. We will take nothing from China. We will just stop giving. But the same will happen if we do nothing, our economy crashes and we stop being a market due to the lack of income. So it is better to limit at least some of the markets from outer access , than to destroy the markets. Even with limited markets China will continue growing - using its internal market. Just like Europeans has done after the WW2.

November 13th 2012

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