Beggar-thy-neighbor, take one

The principle of beggar-thy-neighbor is a pretty simple one in studying the international political economy.  The basic idea is that when times are tough, a national government chooses to enact policies that might boost its own domestic rate of growth — but it does so through policies that negatively affect other countries (yes, perhaps it ...

By , a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.

The principle of beggar-thy-neighbor is a pretty simple one in studying the international political economy.  The basic idea is that when times are tough, a national government chooses to enact policies that might boost its own domestic rate of growth -- but it does so through policies that negatively affect other countries (yes, perhaps it should be called bilking-thy-neighbor instead, but there it is).  Examples include hiking up import tariffs or other trade restrictions, devaluing currencies, imposing controls on the outward flow of capital, and subsidizing exports.  It's generally accepted that a partial cause of the Great Depression -- and a big reason why it persisted -- was that the major economies of the day pursued beggar-thy-neighbor policies for most of the 1930's.  It would be very, very, very, very, very bad if we saw a replay of such policies today.  Why am I bringing this up?  Keith Bradsher's story in today's New York Times:  The Chinese government has begun drafting tax and spending policies to stimulate the economy after third-quarter growth of 9 percent, the slowest pace since an outbreak of Sars in 2003.... As part of the new policy, the State Council announced that it would increase export tax rebates for everything from labor-intensive products like garments and textile to high-value products like mechanical and electrical products. Banks will be encouraged to lend more money to small and medium-size enterprises and support programs will be drafted to help farmers, the government said.... Increased export tax rebates will make Chinese exports even more competitive in the United States and Europe, particularly as China has intervened heavily in currency markets to halt any further appreciation of China’s currency since mid-June. But with the United States heavily dependent on China to buy the Treasury bonds needed to finance a bailout of the American financial system, the Bush administration has stopped criticizing China’s trade and currency policies. To be fair to Beijing, other expansionary policies are being pursued.  Still, given the country's strong fiscal position, and given China's overreliance on export growth to fuel its job creation, I'm not sure that export tax rebates are the way to go here.  I strongly encourage China-watchers to let me know if I'm overreacting. 

The principle of beggar-thy-neighbor is a pretty simple one in studying the international political economy.  The basic idea is that when times are tough, a national government chooses to enact policies that might boost its own domestic rate of growth — but it does so through policies that negatively affect other countries (yes, perhaps it should be called bilking-thy-neighbor instead, but there it is).  Examples include hiking up import tariffs or other trade restrictions, devaluing currencies, imposing controls on the outward flow of capital, and subsidizing exports.  It’s generally accepted that a partial cause of the Great Depression — and a big reason why it persisted — was that the major economies of the day pursued beggar-thy-neighbor policies for most of the 1930’s.  It would be very, very, very, very, very bad if we saw a replay of such policies today.  Why am I bringing this up?  Keith Bradsher’s story in today’s New York Times

The Chinese government has begun drafting tax and spending policies to stimulate the economy after third-quarter growth of 9 percent, the slowest pace since an outbreak of Sars in 2003…. As part of the new policy, the State Council announced that it would increase export tax rebates for everything from labor-intensive products like garments and textile to high-value products like mechanical and electrical products. Banks will be encouraged to lend more money to small and medium-size enterprises and support programs will be drafted to help farmers, the government said…. Increased export tax rebates will make Chinese exports even more competitive in the United States and Europe, particularly as China has intervened heavily in currency markets to halt any further appreciation of China’s currency since mid-June. But with the United States heavily dependent on China to buy the Treasury bonds needed to finance a bailout of the American financial system, the Bush administration has stopped criticizing China’s trade and currency policies.

To be fair to Beijing, other expansionary policies are being pursued.  Still, given the country’s strong fiscal position, and given China’s overreliance on export growth to fuel its job creation, I’m not sure that export tax rebates are the way to go here.  I strongly encourage China-watchers to let me know if I’m overreacting. 

Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University, where he is the co-director of the Russia and Eurasia Program. Twitter: @dandrezner

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