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The Perils of Protectionism

China-bashing tends to decrease after US elections, but protectionist sentiment in the US is unlikel 

Developed economies,
along with emerging markets, have increasingly used protectionist moves as growth stalls
(photo: iStockPhoto.com)

 

With the world economy unlikely to turn around anytime soon, the tide of protectionism is expected to prevail in the medium term. That’s despite the unusually restrained approach to trade restrictions since the onset of the 2008 global financial crisis. 

It won’t be just in the United States and the European Union, however, that traders can expect punitive measures. Emerging markets, including Brazil and Argentina, are posing protectionist threats to Hong Kong exporters. 

Protectionism, which embraces a wide array of tools and practices to restrict trade, has a long history. It tends to arise in times of economic crisis, with an array of tariffs and non-tariff barriers. But protectionism always damages the industries and people that governments seek to help, hurting the well-being of both importing and exporting economies. 

Remembering the Depression

 
 

Protectionism is on the rise in both developed and developing economies, warns Daniel Poon, HKTDC Principal Economist for Global Research

The Great Depression serves as a vivid example. It was the longest and deepest global economic downturn of the last century, triggered by the US stock market crash in October 1929. While the underlying causes of the Great Depression were multifold, trade protectionism legislation, in addition to faulty fiscal and monetary policies, played a significant role in making a bad situation worse. 

In June 1930, the US enacted the Smoot-Hawley Tariff Act to protect local industries, raising import tariffs on more than 20,000 items to record levels. Even today, there is no consensus on the extent of protection that the Smoot-Hawley Tariff Act afforded to US industries. But the act contributed negatively to combatting the global economic downturn.  

Anti-globalisation efforts articulate national fears 

Anti-globalisation efforts
articulate national fears
(photo: iStockPhoto.com)

 
Higher US tariffs sparked retaliation, pushing the world into the Great Depression. In the lead-up to the Smoot-Hawley Tariff Act, it was Canada, the US’ largest trading partner, which substantially raised the import tariffs on products that constituted the bulk of its US exports. Europe followed suit. 

Consequently, such policies led to a slump in world trade. Between 1929 and 1932, US imports from Europe fell by more than 70 per cent, while US exports to Europe declined by nearly two-thirds. It was a harbinger of trade destruction. 

In the wake of the Smoot-Hawley Tariff Act, the world made great efforts after the Second World War to prevent a repeat. The guiding principles in international trade has been that tariffs and other trade barriers should be lowered, primarily through multilateral agreements under the umbrella of the General Agreement on Tariffs and Trade and the World Trade Organization (WTO). 

Trade barriers have duly been greatly reduced in successive rounds of multilateral trade liberalisation, and international trade has expanded rapidly to benefit exporters, producers and consumers. 

Protectionism Amid Financial Crisis

 Developed economies, along with emerging markets, have increasingly used protectionist moves as grow
 

China-bashing tends to decrease after US elections, but protectionist sentiment in the US is unlikely to fade (photo: EyePress)

As if heeding the lessons of the Great Depression, there seems to be no pervasive resort to trade restrictions in the financial crisis of the past few years, leading to a rebound of world growth and international trade. 

The fallout from the financial crisis remains, however. Following a strong rally in 2010, world growth and trade have slackened markedly since mid-2011. This insipid performance was initially caused by the disastrous earthquake in Japan, then the slower-than-expected recovery in the US and, more seriously, the deepening sovereign debt crisis in Europe. 

Against this backdrop, the undercurrent of protectionism has become more apparent recently, fueling trade tensions that could help derail global recovery. According to the WTO, 124 new trade restrictive measures were introduced by G20 members from mid-Oct 2011 to mid-May 2012, affecting some 1.1 per cent of G20 imports, or 0.9 per cent of world imports, compared with 0.6 per cent and 0.5 per cent over the preceding period, respectively. 

The accumulation of trade restrictions since October 2008, excluding those that were removed, covered 3.8 per cent of G20 imports, or 2.9 per cent of world imports, as of mid-May 2012. According to the WTO, the most popular restrictive measures have been such trade remedies as anti-dumping, countervailing and safeguards, tariff increases, import licenses and customs controls. In terms of trade coverage, the most affected products have been optical and other precision instruments, motor vehicles, machinery and mechanical appliances, electrical machinery, iron and steel, and meat. 

Failure of Doha Round

   
  Survival Tips for Exporters 
 

Hong Kong, which relies heavily on the Chinese mainland as its production hinterland, is highly vulnerable to trade protectionism. To lessen the adverse impact of protectionist measures, Hong Kong exporters and manufacturers should take heed of trade and regulatory developments in overseas markets, covering not only traditional markets such as the US and the EU, but also emerging markets, which are also raising barriers to international trade.  

To plan ahead, they should identify and monitor the possible sectors most likely subject to protectionist action. Protectionist measures will target the hot items that hit the mass markets. To avoid being over-exposed to the low-to-medium-end of the market, it’s advisable for Hong Kong suppliers to actively identify market niches higher up the scale.  

While keeping an unbiased focus on creating more value for their products, Hong Kong traders have to work consistently on product differentiation, upgrading quality, image and style. If anti-dumping or countervailing proceedings have been initiated, exporters should participate in the investigations to reduce the adverse effect of the allegations. 

At an industry level, companies should join forces, possibly through coordinating with trade associations, to mount well-organised, speedy responses to any allegations. 

Individual companies should respond to questionnaires during investigations and provide the information requested. Otherwise, investigators would base their findings on the best information available to them, which could be particularly disadvantageous to exporters. 

Similarly, traders or manufacturers not named in proceedings should participate in investigations. Otherwise, anti-dumping or countervailing duties much higher than those imposed on other companies might be applicable. Hong Kong exporters are also advised to maintain a diversified production and sourcing base rather than solely concentrate on the mainland, which is frequently the target of overseas protectionism, due to its size and sustained competitiveness.

By operating in a global setting rather than putting all their eggs in one basket, Hong Kong suppliers can ensure that their deliveries to overseas buyers will not be handicapped by any restrictive measures on mainland imports.  

Given the proliferation of health, safety and environmental-protection measures, Hong Kong exporters should also keep an eagle eye on relevant regulatory developments.  

Enhancing product design, using the right parts and components, beefing up production, as well as strengthening testing and inspection, are among the crucial tasks to perform. 

 
   
Apart from the renewed downturn of the global economy and trade, the failure of the Doha Round has also played a part in igniting protectionism. The latest round of multilateral trade negotiations, under the auspices of the WTO, started in November 2001, with an objective of further liberalising global trade and lifting living standards worldwide. 

It covers trade in industry products, agriculture, services and a number of issues more indirectly related to trade. According to the Peterson Institute for International Economics, the Doha Round could lead to a potential gain in exports of about US$280 billion per annum. Initially scheduled for a conclusion in 2005, the Doha Round has missed several deadlines for reaching a final deal. As many hurdles obstructing the Doha negotiations are political, especially relating to agriculture, prospects remain uncertain.  

Without a compromise on Doha, the WTO’s dominance in the world trading system is diminishing, and more and more bilateral agreements are replacing the multilateral framework. By all indications, the stream of support for free trade is waning. 

Persistent Protectionism

The poor outlook of the global economy, plus the murky prospects of further multilateral market liberalisation, suggests that threats of protectionism are not expected to subside over the medium term. Premising the rising trend of using anti-dumping and countervailing actions by the EU, the European Commission officially launched an anti-dumping investigation in early September 2012, to determine whether solar panels manufactured in the Chinese mainland are sold in the EU below cost.  The case is the EU’s highest valued anti-dumping investigation, as it covers imports from the mainland worth euro 21 billion, with the EU market accounting for 80 per cent of Chinese solar equipment sales worldwide.  

Also in September, the EU’s ProSun, the industry association led by Germany’s SolarWorld, filed an anti-subsidy complaint at the Commission, alleging that Chinese authorities are providing massive and illegal subsidies to Chinese solar manufacturers.

To complicate matters, US trade relations with China were politicised in the run-up to the presidential and congressional elections in early November. 

Apart from anti-dumping and countervailing actions, the most notable development involving the mainland was the filing by the US, in mid-September, of a WTO dispute settlement case against certain export subsidies provided by the mainland to the domestic automobile and auto-part industries. China-bashing was an abiding feature of the American political debate, but its intensity usually decreases after presidential and congressional campaigns. Given lingering economic problems, however, protectionist sentiment in the US is unlikely to fade. 

Environmental Protection Measures

The proliferation of health, safety and environmental protection measures is also a cause for concern. The EU will maintain its focus on safeguarding consumers and the environment, exemplified by the continuing enhancement of directives concerning electronic and electrical equipment, chemicals, toys and eco design.  

In the US, too, consumer and environmental protection is catching up fast, with states addressing a number of issues to fill the gap left by federal legislation.

Another worrying development is the escalation of protectionism in some emerging markets, such as Brazil and Argentina. Anti-dumping actions aside, safeguard measures, in tandem with import tariff increases and a number of non-tariff barriers, have been commonly taken by emerging countries to protect domestic producers.  

In some cases, trade barriers appear in the form of procedural requirements to hinder import clearance, making market access more difficult as uncertainties facing traders increase, and as the risks and costs of doing business rise. The use of safety and environmental protection measures, like their counterparts in the developed world, is also on the rise in emerging markets.

For more on economic trends, please see the December issue of the HKTDC Trade Quarterly.

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