Monday, December 12, 2005

Protection, protection, protection

China produces a lot of steel. We need steel. When we buy, we like to pay at lower price. China overproduces: it's people don't need that much of steel. China would like to sell the remaining steel to other countries. Indonesia is close, so why not? Note that the term "overproduce" and "remaining" suggest lower price (why?). Conclusion: we can buy steel at a lower price that we used to. What's wrong with this story? Seems like everybody is happy.

But not so fast. It turns out, there is also a steel producer at home. It's been in the business for quite a long time (no, it's not an infant industry company). It worries that Chinese steel will outcompete theirs in price. What would it do? You're right. Ask for protection!

By the way, the company is state-owned. Sounds familiar?


  1. Krakatau Steel? :)

    I still refuse to accept that free market is the only way to run an effective economic system. Complex systems often have more than one solutions; I think this also applies to economy.

  2. Perhaps i still need extra explanation from you Mr. Aco...

    My question is if you compare the effects of an import of a commodity from other country and the effect of buying from your own country producer of the same commodity, what makes better than the others??

    i think that if you buy from your own country producer you will engage the economy of more than one sector in your economy because of the intersectoral connection in your country.

    Compare with the import from China you only throw your money to China and let them use it to acclerate their growth.

    Please explain more to me...

  3. Dear Jay (and blogwoner), allow me to use an illustration.

    If you buy a donut from, say, SuperDonuts, where is your money going to? To SuperDonuts. What do you get? A donut. Question: why don't you produce your own donut AND keep your money -- so you can have both: a donut and some saved money? Because you can't produce a donut. Wait, you might be ABLE to produce a donut. Only that it would be prohibitively expensive. In other words, if you produce your own donut, it'd be very inefficient (and expensive of course). It'd be taking all your time. Instead of doing your current job, you'd be busy baking your donut. At the end of the day you realize, it's better to buy it from SuperDonuts.

    That's another way to saying that SuperDonuts can produce donut more efficient than you do. So, why would you bother producing it your own?

    But let's say you are stubborn. You still want to produce your own donut, because you want to sell some and make money. For some reason, you can't beat SuperDonuts production plant who's been in the business for quite a while. As a result, you can't sell donut at lower price per unit than SuperDonuts. Then you start seeking for protection. You tell the major: Please ban SuperDonuts. I want to sell my donuts in the city. I can't compete with SuperDonuts' price. So please kick them away.

    What did you just do? You're trying to take MY rights to buy donuts from SuperDonuts. Meaning, I -- and other customers -- who could have bought cheaper donuts from SuperDonuts, now can only buy from you. And, thanks to your protection, at a higher price!

    Do you think it's fair?

    You might say, well, Aco's story is about something that happens WITHIN one country (or, city). It has nothing to do with money enriching China or OTHER countries. To me, it's the same.

    But now, you'd ask: protecting domestic company from foreign competition is good because it creates employment at home. Allow me to again use my SuperDonuts story. SuperDonuts, too does create employment. In fact, it might employ more worker than your home donut production.

    You might ask again: well, if it's China that produces, the employment benefit will go to that country , not to our home, Indonesia. This is just another form of discrimination. What gives us the right to take employment opportunity in China and send it home? When somebody in America bought a pair of Nike shoes made by Indonesian labor in Tangerang, I don't think you'd call that unfair, no?

  4. To Jay --
    If the choices are:
    1) buying steel from domestic producer with a high price, forcing the other sectors that use steel to run with higher cost; or
    2) buying cheaper steel from China, then enables the domestic economy (building/road/bridge constructions, automobile assembly etc.) to run with lower cost,
    then which option do you think would generate more multiplier effect to the economy?

    Yes, we give the money to the Chinese steel producer. But at the end, if that generates higher multiplier effects, I'd rather do that than giving the money to KS, and the money would sunk in the high-cost, non-efficient economy.

    To blogowner --
    Off course, complex systems, including economy, have more than one solution. For a general reply to your comment, in history we've seen several solutions: from Soviet-type central planning, Latin American-type import substitution, etc. The question is: which one do (should) we choose, and on what basis?

    If you don't like a generic-type discussion, let's talk on a case-by-case basis. In this steel case, if we simplify the choices to two: to protect or not to protect, which one do we (you) choose, and on what basis?

  5. a.p.,

    I would probably choose neither extremes. I would grant some degree of protection to the domestic steel, so as not to kill it outright. I would also let some steel import from china, also as a way to create pressure on my own steel management to improve their production process.

    I don't see state intervention as something evil; even state monopoly. It's all down to how you play it on the field. Things are not that black and white anyway.

    As for which system to choose for Indonesia, I beleive for Indonesia THE problem firts of all is a political one rather than an economical one. With weak and incosistent leadership, it's probably doesn't matter which (modern) economical system we try. It will fail.

  6. To blogowner:
    Yes, I agree with you about nothing's black or white. What I meant to ask was, if we are to choose a policy (or in a broader sense, an economic policy or ideology), on what basis will our choice be?

    Let's say the argument is "we HAVE to protect (save) our domestic industry." Why? Is it to save the fate of the employers, the factory, the management board etc? I agree those are noble ideas. But on the other hand, how should we justify the favor granted to an industry that has been there for years, has been receiving protection for years ("strategic industry") but yet it can not be competitive enough after that. Why should we choose to harm the steel consumers their right for cheaper steel?

    I won't object your idea on granting "some degree of protection." It can be done practically. The question is how do we come up with the number of "efficient tarriff?" As you said, everything's political. There will always be interests to ask for more and more.

    Oh, BTW, the weakening of Rupiah and strengthening of Renmimbi has actually provided some degree of protection. Then why still domestic steel can't compete?

    And, as you said, the problem here is political. I'm afraid if it's so, giving more space for the government (and the politicians) to intervene in the economy would end up giving spaces for them to serve interests group. Government failure is more serious than market failure. As Friedman said, in this case free market would serve as a tool to reduce concentration of political power.

    Again, your comments (also Jay's) are good ones. I do enjoy them. I just try to give the position from the other spectrum...!