Is China really protectionist?
I was stuck at an airport for a couple of hours recently, thanks to an airline which I shall not name. Operational reasons. While there, I happened to eavesdrop on a conversation about industrial policy. The summary of the conversation went something like this: “how can we be importing x, y, and z, and in the process ship jobs abroad? Look at China! They protect their industries and see how well they are doing”.
The chain of thought in itself is not surprising. It is very similar to what is parroted day after day by industrialists who are seeking protection from foreign competitors, and government officials who indulge them. The interesting part is how China always seems to be touted as the beacon of protectionism. Of course, over the past 30 years they have had tremendous economic growth but is China really that protectionist? To answer that question, it is useful to understand where China is historically coming from.
In 1921 the Communist part in China was formed, and after a revolution gained control of China in 1947. Being a communist party, they implemented something similar to the soviet model, with almost complete state control of the economy. Of course, in this context the question of protectionism and international trade is moot.
In 1958, they launched “the great leap forward” campaign to “rapidly industrialize” China and move it from a largely agrarian to an industrial nation through collectivization. At this point, China did trade, mostly with other communist countries especially the U.S.S.R, but there was trade with non-communist countries too. For instance, trade with U.S.S.R hit $1.7bn in 1960. Of course, that trade was completely driven by government with non-government-approved trade banned.
Needless to say, the great leap forward was a failure, resulting in economic collapse and the death of somewhere between 18 and 55 million people. The great leap forward was followed by the cultural revolution through which China still traded with the world, hitting a record high of $4.5bn in 1971. Still the complete control of industry by government, combined with other factors meant there was almost no economic growth. In terms of the level of protectionism, this was China at its most protectionist.
The economic turnaround started shortly after upheavals within the communist party saw Deng Xiaoping gain de facto control in 1977. Economic reforms started shortly after, with a move towards market based polices and foreign trade. A central goal of the economic reforms was the focus on foreign trade, specifically on exports. As Deng Xiaoping was frequently quoted, the policy was simply about “reform and opening”, opening up their economy to foreign investment, goods, and people. The self-sufficiency goals of the previous decades were abandoned in many sectors and the focus was shifted to trade, exporting, and of course importing.
In terms of being protectionist, you cannot say that China did not protect any of its industries or became completely open overnight. Politics is a very real thing even in China, and that would probably have been politically difficult. That being said, China was moving only in one direction, and that is becoming less protectionist and becoming more open. This shift towards openness is symptomized by the set-up of special economic zones. In 1979, the Chinese government set up four special economic zones with de facto free trade between those zones and the rest of the world. In essence, the level of protectionism in these economic zones was close to zero. In 1984, the idea was expanded to 14 coastal cities. The effect has, as expected, been tremendous for China.
China today is continuation of the evolution of China from the 1980s, with a slight shift in focus towards domestic consumption as it reached middle income status. The focus on trade is however still central to their economic policy. This is not to say that you will not find any protected industries in China.
However, China of today is more open and less protectionist that China of 2000, which is less protectionist that China of 1990 which is less protectionist than China of 1980 and so on. In terms of protectionism, China is moving in only one direction.
The moral of this story is that China is really not a good case study for the “success” of protectionism. Since the economic collapse of the 1960s and 70s, China has almost never used protectionism as a tool to engineer economic growth. In fact, all the evidence points to an association between the abandonment of protectionism and other controls, and industrial growth in China. The next time someone points to China as an example of the success of protectionism, educate them on China’s economic policy history, and ask them to reconsider their position.
• Nonso Obikili is an economist currently roaming somewhere between Nigeria and South. The opinions expressed in this article are the author’s and do not reflect the views of his employers.