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Election Year Rhetoric

Two thousand four is a highly political year, of that there is no doubt. Across the world, people will discuss issues, select candidates and vote for their choices in more than 90 jurisdictions, including here in Hong Kong. In the process, we need to remember that participatory politics is often more emotional than rational, causing people to say things they don't fully mean or take positions they are unable to defend. In the end, those chosen to lead often end up differing little from those they've defeated in the polls.

As the U.S. presidential election heats up, the two major parties are seeking to differentiate themselves in the eyes of voters by staking claim to what they perceive to be the most popular positions. At the time of writing, national security -- and particularly the response to terrorism -- is high on the agenda, and is likely to remain so in the wake of the Madrid tragedy.

However, history shows that pocketbook issues such as inflation and unemployment are typically the decisive ones. This year, trade has become a pocketbook issue in America. Because of the bursting of the dot-com bubble and the slow recovery from the 2001 recession, employment has contracted while the fiscal and trade deficits grew to record levels. Linking imports to jobs is seen as an election winner, and U.S. imports from China are soaring.

In 2003, the U.S. had a US$124 billion merchandise trade deficit with China, prompting some politicians to demand higher import duties or a rapid revaluation of the renminbi. From this point of view, China is a closed market that only wants to export, and has unfairly kept its exchange rate pegged to the US dollar in order to win market share from American producers. If commerce between the two countries were more balanced, they argue, American unemployment would decline.

Hong Kong has a clear stake in keeping the direction of global trade diplomacy moving toward less restrictive practices. Last year, our two-way trade in goods and services was 3.3 times as large as total GDP. Direct services to trade comprise 20 percent of our GDP, transport and storage another 8 percent and financial services related to trade even more. The rise of protectionism threatens a critical sector of our economy, and it must be countered.

Those in the United States who espouse greater protectionism miss two critical points. First, U.S. manufacturing jobs have been declining, as a share of total employment, in a straight line since 1945. This structural shift had nothing to do with last year's trade deficit, the rise of China as an exporter or the value of the renminbi.

The second point is China's role in the world trading economy. From a global perspective, China is the fastest growing large market, taking in an extra US$117.6 billion in imports last year, up nearly 40 percent over 2002. The US$7.9 billion deficit in China's trade in the first two months of this year  due to an additional US$23 billion in imports  just confirms the trend.

The China market is particularly important for East Asia, even as manufacturing shifts from Japan, Korea and other places into the Mainland. China's imports from East Asia grew by US$64.3 billion last year, up over 37 percent, and accounted for more than half of the growth in exports from the region to the world.

Across the Pacific Ocean, the story is quite different. The U.S. bought an additional US$27.2 billion worth of goods from China, but only US$1.5 billion more from the rest of East Asia. As a result, the U.S. trade deficit with Japan, and the rest of North-east Asia dropped sharply, largely due to the shift of manufacturing to China.

The threat of protectionism is growing, and needs to be countered because trade restrictions are not a zero-sum game. Since World War II, global growth has pulled hundreds of millions of people out of poverty, a feat that owes a great deal to the lowering of trade barriers. (The average tariff in industrialised countries declined from 15 percent 50 years ago to less than 5 percent today.)

The decline in trade barriers is partially due to the risk of retaliation, which serves as a strong deterrent to protectionist tendencies. Recently, we've seen such responses to U.S. protectionism from the European Union, China and Russia. If tariffs, sanctions, quotas or other non-tariff barriers were  to expand, it would mark a sharp departure from the enormously positive trends of the past half-century.

Our city has been chosen to host the Sixth World Trade Organisation Ministerial Conference, due to be held by the end of next year. Negotiations under the Doha Development Agenda will reach a critical juncture in the coming year, and as key beneficiaries of liberal trade rules, we in Hong Kong need to be vocal in our support for greater access to markets, for all countries. 

Anthony Nightingale
Chairman
HKGCC