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The US decision to restrict
imports of mainland tires may open the floodgates to safeguards against other products (photo: Zhang Chonghui) |
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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 United States, the adoption of “beggar thy neighbour” policies triggered a slump in international trade. Between 1929 and 1932, US imports from Europe plunged more than 70 per cent, while US exports to Europe contracted by almost two thirds. World trade in volume terms did not get back to 1929 levels until the end of the 1930s, despite the recovery of most economies by 1933.
Thankfully, there appears to be no widespread resort to trade restrictions in response to the global economic crisis. 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.
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Hong Kong companies should monitor trade and regulatory developments in overseas markets, especially the US and the EU |
Section 421
But anti-dumping aside, many countries, especially developing nations, have raised tariffs and non-tariff barriers. These include increased tariff duties, import licences, pre-shipment inspections, procurement restrictions and investment barriers across a wide range of products. Safeguards have also been increasingly used by a number of countries as a tool to protect their domestic industries.
Of particular importance is the recent US imposition of safeguard duties on mainland tires 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.
A full-scale trade war, however, is unlikely, given the importance of international cooperation for global recovery and the presence of the WTO and various multilateral frameworks. The US is surely not interested in starting a trade war with China or placing new burdens on business or on consumers as its economy gains momentum. And China’s swift reaction to the tire case may prompt other trading entities, such as the European Union, to think twice before pursuing any protectionist moves.
Best Defence
In any event, the tide of protectionism is not expected to subside anytime soon. Unemployment will generally remain high even when the world economy gathers steam, and calls for further protection of domestic industries are plausible. 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.
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China’s apparel industry may
well be the next target of US safeguard duties |
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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 stay abreast of 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. They should identify and monitor possible sectors most likely subject to protectionist actions, to plan for any changes that may affect their business. As it usually takes time for governments to implement protectionist measures, Hong Kong companies can respond properly to minimise disruption.
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Preparing for the Worst
International trade and customs attorney Brenda Jacobs advises Hong Kong exporters how best to prepare for further US trade remedy measures at a seminar in Hong Kong last week
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Observers believe that the garment industry may well be the next target of trade protectionists. “It’s hard to say,” said Brenda Jacobs, an international trade and customs attorney with Sidley Austin LLP, based in Washington DC. Ms Jacobs was in Hong Kong last week, taking part in a Hong Kong Trade Development Council seminar on US trade remedy measures against mainland-origin products. She noted that the US fabric and yarn industry has been seeking a monitoring programme against apparel imports. But the threat, she said, is “more real” from US manufacturers of niche or technical products that have heavy capital investment.
Given the uncertainty, the best defence, according to Ms Jacobs, is to prepare for the worst. Being prepared, she said, involves gaining a solid understanding of the US process, the deadlines and the questions that need to be answered. She also advises companies to be sensitive as to whether their products benefit from any government programmes that could be perceived as promoting export surges. And she suggested that companies should work with their US clients, talking about both sides’ contingency plans in the event of any new regulatory measures introduced in the US.
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Hong Kong companies are also advised to maintain a diversified production base rather than solely concentrating on the mainland. To alleviate the threat of restrictive import measures, they should consider undertaking production activities in a global setting rather than putting all their eggs in one basket.
Overseas buyers have long commended Hong Kong as a global sourcing centre, where orders can be placed but with production allocated to different places according to cost and delivery lead time, as well as the level of sophistication and complexity required. As such, Hong Kong exporters should sharpen their sourcing skills to ensure that their service to overseas buyers will not be handicapped by any restrictive measures on mainland imports.
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 mass markets, Hong Kong suppliers should actively identify market niches higher up the scale.
Hong Kong companies should, as well, strive to strengthen their long-term competitiveness by moving further towards high value-added processes, such as design, branding, sales and marketing, financial control, production coordination, logistics, and retail and distribution. In particular, design and branding, which are the keys to product differentiation, play an important role in shaping competitiveness in the world market.
For more details, please see the HKTDC report, “Protectionism in the Midst of Global Recession,” which can be ordered at www.hktdc.com/bookshop.
