• Fears that the world would resort to protectionism in the midst of the global financial crisis have largely proved unfounded.

• While anti-dumping measures remain a popular and handy trade remedy tool, initiation of new investigations has been constrained.

• Yet many countries have raised tariffs and non-tariff barriers, and more safeguards have been adopted to protect local industries.

• Despite the US tyre case against China, a full-scale trade war is not likely, given the need for cooperation for global recovery and the well-functioning of multilateral frameworks.

• In any event, the tide of protectionism is not expected to subside anytime soon, as unemployment and overcapacity will persist after the recession.

Summary

Protectionism tends to be pervasive in times of economic crisis.  By erecting new protectionist barriers, countries strive to shelter domestic industries from overseas competition and export unemployment abroad.  But protectionism can hardly serve its purpose.  It always damages the industries and citizens that governments intend to help, hurting the well-being of both the importing and exporting economies.

The Great Depression in 1929 serves as a notable example of the devastating effects of protectionism.  Led by the US, the adoption of “beggar thy neighbour” policies triggered a slump in international trade.  Between 1929 to 1932, US imports from Europe plunged by more than 70%, whereas US exports to Europe contracted by almost two thirds.  World trade in volume terms did not get back to the 1929 level towards the end of the 1930s, despite the recovery of most economies by 1933.  

Taking heed of experience, there appears to be no widespread resort to trade restrictions in response to the global economic crisis since the start of the global financial crisis in September last year.  The World Trade Organization (WTO) and various multilateral frameworks seem to work well in restraining protectionist trade measures.  While anti-dumping measures continue to be a popular and handy trade remedy tool, initiation of new investigations has been constrained.

But anti-dumping aside, many countries, especially developing nations, have raised tariffs and non-tariff barriers, such as increased tariff duties, import licences, pre-shipment inspections, procurement restrictions and investment barriers, across a wide range of products.  In the meantime, safeguards have been increasingly used by a number of countries as another tool to protect their domestic industries.

Of particular importance is the US’s imposition of safeguard duties on mainland tyres under Section 421, which implements the transitional product-specific safeguard provisions contained in China’s WTO accession agreement.  It is the first time since Section 421 was incorporated into US law in 2000 that a Section 421 petition has resulted in the imposition of import relief, opening the floodgate to safeguards against other products.

In response, China has taken steps to challenge the safeguard duties at WTO, and has launched anti-dumping and countervailing duty investigations on imports of poultry and car products from the US.  There is a possibility that China could take additional retaliatory measures, especially if the US moves ahead with other safeguard proceedings.

However, a full-scale trade war is unlikely, given the importance of international cooperation for global recovery and the well-functioning of WTO and various multilateral frameworks.  The US is surely not interested in starting a trade war with China or placing new burdens on businesses or consumers as its economy gains momentum, while China’s swift reaction to the tyre case may prompt other trading entities, eg the EU, to think twice before pursuing any protectionist moves.

In any event, the tide of protectionism is not expected to subside anytime soon.  For one thing, unemployment will generally remain high even when the world economy gathers steam, and calls for further protection of domestic industries are plausible.  For another, overcapacity may also generate pressures after economic activity picks up.  It is thus held that continued slippage towards protectionism will persist, especially for developing countries competing with the Chinese mainland.

Hong Kong, with its export orientation and reliance on the mainland as a production base, is highly susceptible to trade protectionism.  To lessen the adverse impact of protectionist measures, Hong Kong companies should, in the first place, pay heed to trade and regulatory developments in overseas markets, covering not only the traditional markets, especially the US and the EU, but also the emerging markets, which hold increasing potential for Hong Kong suppliers.

Meanwhile, Hong Kong companies are advised to consider maintaining a diversified production base rather than solely concentrating on the mainland.  Hong Kong companies are also advised to concentrate on the medium-to-high-end of the market.  Since protectionist measures usually target the hot items that hit the mass markets, it would appear advisable that Hong Kong suppliers actively identify market niches higher up the scale.


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