China Pushes Its Businesses To “Buy China”

As the US started to head into the worst part of the recession, several members of Congress tried to float legislation that would strongly encourage US citizens to buy products made in America. Most moderate thinking from the Administration and mainstream members of House and Senate killed the initiative quickly.

China has decided what American rejected was actually a good idea.

According to the AP, “China has imposed a requirement for its stimulus projects to use domestically made goods.” Since sales of US goods into the world’s most populous country are important to the recovery of the American economy anything that undermines exports has the potential of hurting GDP growth.

The central government in China has the capacity to enforce the rule by using its own $585 billion stimulus package as a means to exert pressure on the nation’s manufacturing sector. Firms that buy components or raw material that could be procured in China won’t get government money.

The program will backfire for several reasons. The first is that governments in the West are likely to react badly to it. That is an obvious and nearly certain result.

Less obvious is the fact that the program could cause a compression of margins at Chinese companies and eventually trigger increasing inflation. Many of the imports used by mainland manufacturers cannot be readily or inexpensively obtained in China, the major reason that they are imported in the first place. Buying Chinese goods or materials which are more expensive that imports could harm profitability in a number of industries making them more likely to cut workers and add to China’s already severe unemployment problem.

The other by-product of forcing China products on Chinese companies is that the firms will have to try to raise prices to offset any increased costs that they incur by sourcing materials inside the country. Price increases, if they are effective, will tend to fuel inflation. One result of the country’s stimulus package is that it has given more access of credit to consumers, giving them the ability to spend beyond their immediate means. Chinese goods may be more expensive because they are built with Chinese components, but the government means to flood capital into the market to offset that.

“Buy China” looks good on paper, particularly from the vantage point of the communist central government, but its economic future is flawed at its beginning.

Douglas A. McIntyre