Tuesday, August 28, 2007

Defining Pro Market

By now, most everyone knows of China’s recent toy making deficiencies. One of the stories from McClatchy newspapers cites President Bush as saying that he chose not to enforce stiffer production standards in China for the reason that such enforcements would not be pro-market.


“The overall philosophy is regulations are bad and they are too large a cost for industry, and the market will take care of it,” said Rick Melberth, director of regulatory policy at OMBWatch, a government watchdog group formed in 1983. “That’s been the philosophy of the Bush administration.”
However, considering that the regulations to be applied on China would be for the sake of safety, it is important to realize the parallels that could be shown to our president in order to illustrate how he may have missed the point of what “pro-market” really is.

Taking a close look at the automotive industry, many regulations have been enforced for the sake of safety. Yet, no one makes any claims that making seatbelts and air bags mandatory stifles competition. In fact, now auto manufacturers boast about the amount of safety their vehicles carry.

Pro-market competition really was not what President Bush’s comments were about. In reality, Chinese manufactures have to deal with the fact that they will have an increase in production costs in order to make sure their goods are in fact, good enough to be sold. Even if there were no regulation about lead content, then the free market is working anyway due to the fact that no one would buy the product. If it just so happens that people are afraid of China’s products; then China will have to deal with it.

In the same manner, home building, mortgage, and financial firm shares have suffered in the past month. Is the market being held hostage by some unnecessarily gloomy outlook on short to near term future? Well, you will not hear me say that it is not. However, it is in these conditions where those with a sane frame of mind calm themselves and look for opportunities where firms are now being undervalued.

With Chinese toys, with financials, and with homebuilders we are seeing a correction in market pricing, and a complete re-thinking of how the market prices risk. When China threatens retaliatory tariffs on the U.S. we have to remind them that their products are to blame, and that it is the consumer who will ultimately forgive them.

Making sure products are safe is in no way defeating competition so long as the rules and regulations are the same for everyone. Ideally, if consumers had information about all the products and their contents, then the free market would provide roughly the same outcome as a watchdog group taking products off the shelf.

However, sometimes people are not shown the contents of items, and as I have stated before, market failures are sometimes best fixed by an entity whose purpose is not profit. In this case, consumers may not have as much a voice in other countries as a U.S. trade representative.
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