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Shield of protectionism only skin deep

(China Daily)
Updated: 2009-11-27 07:56

Edgar Hotard, chairman of Monitor Group (China).

Within a week of US President Barack Obama's visit to China, the US Department of Commerce decided to slap final countervailing duties (CVD) on the import of $2.6 billion worth of goods from China. As trade frictions between the United States and China rise, leading consultant Edgar Hotard tells China Daily's Wang Yiqing that protectionism is not the answer to the global financial crisis.

Many Americans may not even know the exact meaning of trade protectionism. But they can feel its harmful effects after the US raised its tariff on China-made tires, says Edgar Hotard, chairman of Monitor Group (China).

The Chinese tires now cost much more than before. Though the media have been talking a lot about how the increased US tariff will hurt Chinese manufacturers and workers, its real impact has been far wider, Hotard says.

The protectionist measure has hurt American, especially middle and lower-middle class, consumers and tire-related industries, too. The rise may ultimately price out Chinese tires from the US retail market, but related industries will also suffer the ripple effect - as the shipment and transportation of China-made tires shrink, some Americans employed in the distribution and sale chain will lose their jobs.

The US labor unions have suggested that the tariff will benefit workers in America's tire-manufacturing sector. But the fact is that very few low-priced tires are made in the US these days. So even if protectionism eases the unemployment pressure temporarily, it will prove to be ineffective in the long term. Besides, Sino-US trade disputes could benefit enterprises in some other countries, say tire manufacturers in Mexico. All this should make policymakers rethink their political decisions on trade.

The protectionist measures and some recent calls given by the US government, such as "Buy American", have left many wondering whether the world is headed toward protectionism. But, Hotard says, it is too early to be so pessimistic.

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When it comes to trade protectionism, it is important that we take a long-term view, he says. The past few years have seen the rapid development of the global economy, based on free and open trade, and we have reasons to believe that it will remain the mainstream global trend. But more trade frictions may occur between the two sides.

Take Sino-US trade disputes for example. The US government looks at the increase in tariff on Chinese tires from the domestic employment point of view, apparently because of prevailing political pressure. China, on the other hand, sees it as a violation of the free trade principle. In fact, China has begun an anti-subsidy investigation into US auto manufactures' claims.

Beijing's move is like a warning to Washington that the Chinese government will protect its trade and other rights at any cost, even though such actions have more symbolic than real value. Experience from the George W. Bush administration, however, has taught us that US protectionist measures should not last long.

Hotard says regular and intensive interactions between China and the US could ease the situation because the two countries tend to focus on far-reaching strategic issues and try to take the mutually understanding approach to solve bilateral problems.

For the time being, Chinese companies reeling under the impact of raised US duties could shift their exports to other countries. In fact, some of them have started doing so. But in the long run, he says, Chinese companies have to rethink their competitive edge.

In other words, instead of relying solely on low production costs as an advantage, they should try and add value to their products and services through innovation. For example, they can improve the quality, function, models and designs of their products, and make their marketing strategy more efficient to avoid being accused of dumping their products in overseas markets. Nobody would dare to accuse Apple of dumping iPods, Hotard says, because it keeps improving and adding value to its products.

Some countries impose trade restrictions to protect some domestic products. But more and more companies are acquiring true global traits as they invest in places beyond their national borders. That's why China should open up further and encourage domestic enterprises to venture beyond its borders. By doing so they will not only benefit China's economy, but also help open up international trade.

The Chinese government, Hotard says, has dealt with trade disputes most wisely. It has tried to resolve the issues through talks, and urged other countries to do the same, instead of resorting to revengeful actions, which could have easily triggered a trade war.

Trade frictions occur from time to time. Investigations into allegations of dumping or providing excessive subsidy are not uncommon because every country wants to protect its national interest. But such countries should first ask themselves if their decisions have a legal basis or have they been driven by nationalistic feelings, and if their long-term effects on the economy will be good.