Rising global protectionism 0 comments

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The Straits Times reported today that the EU has just warned China that it may erect trade barriers (in the form of tariffs) against shoes made in China, following a similar move against textiles. This is the latest in a series of moves by the developed nations to protect their home industries.

The US has also been active in such trade protectionism. Besides the much publicised tariffs against highly competitive Chinese textile imports, it has in recent years also put up barriers against steel, colour television sets and miscellaneous agricultural imports. US politicians have spoken out against outsourcing operations of their big-name companies, and demanded for jobs to be kept home.

Much of this is understandable. A main reason is that the West sees China as imposing an invisible trade tariff itself through its undervalued renminbi which lowers competitiveness of US exports to China's domestic market. The US, in particular, has been running massive trade deficits with China for years. Big US MNCs prefer to manufacture in China because of the lower labour costs, causing domestic jobs to be lost; the EU increasingly so as their rigid labour laws similarly drive manufacturers overseas.

Outsourcing is a secular phenomenon which has been facilitated by the advanced information technology that has allowed easy communication, coordination and specialisation; it is not likely to go away in a capitalist world. However, specific industries might come in for greater scrutiny by national trade authorities. Those that have come in for special attention fit the following mould: relatively low-tech products whose cost structures are highly pegged to labour costs, employers of many low-wage workers in the home countries, strong local lobby groups arguing against loss of jobs in that particular industry, lack of strong interest groups (such as MNCs) which have a special stake in outsourcing jobs overseas. This is why companies like HP and Motorola will continue to produce their consumer technology products in China and export it to the US without much domestic complaints while more fragmented industries whose products have more political sensitivities (such as agricultural products) will have problems doing the same. This trend is likely to extend into the future as outsourcing takes further hold.

Investors would need to be careful of victims of such protectionism. China's biggest exporter of television sets announced major losses in 2004 stemming, in part, from the US tariffs on television sets.

References:
(1) US-China trade tensions rise
(2) Scandal undermines China's big electronics exporter