China, export restrictions, protectionism and “Buy-China” requirements

by M. Ulric Killion

Photo/Watching America citing “Buy U.S.A.” Provision makes World miss Bush (购买美国货条款让世界怀念布什), China Daily, May 24, 2009. 

On June 23, 2009, the United States and the European Union on Tuesday filed complaints with the WTO over Chinese restrictions on the export of key industrial raw materials, such as coke, bauxite, fluorspar, magnesium, silicon metal, yellow phosphorus and zinc.  

The US and EU alleged that China failed to reduce its export tariffs and raise quotas on these industrial raw materials, and that China's export restrictions created an unfair advantage for Chinese industries.  

To-date, China's response has been the following. 

As for the view from China, and according to China's Ministry of Commerce (MOC), the policy of limiting exports of these raw materials intends to protect the environment and natural resources; therefore, their policy is in accordance with the WTO rules (Bloomberg, 2009).  

On June 25, 2009, China also announced the filing of its own challenge to a US ban on the imports of Chinese poultry (WSJ, 2009). In the interim, China trade policy is also arguably titling toward greater protectionism. A result largely attributable to the new stimulus packages being put in place by many Asian economies.  

In the context of Asian economies, these are the various stimulus packages being put in place by predominantly export-dependent economies. A problem is that these stimulus packages may not be able to adequately protect Asian economies from the consequences of the fundamental shift in trading patterns underlying the current global sub-prime crisis, or simply, global financial crisis. 

Most of the stimulus packages of exporting economies generally premise on a tacit assumption that global trade will commence recovery by the third quarter of 2009; thereby, normalcy is presumed soon to follow.

Many experts would also add, as a possible tacit assumption, that many of these exporting economies will have to undergo structural readjustment. Such as those export-oriented economies that historically focus on selling to the United States and European markets, rather than Asian markets. In other words, this is a structural readjustment of the shift from focus of being an export-oriented economy to greater domestically-consuming economy.

In the era of a global post-subprime crisis, "now dominated by born-again Keynesians, deficit-funded stimulus packages are all the rage." In the context of Asian economies, this is a trend also appearing in Southeast Asia, Vietnam electing to support industry, Thailand attempting to mitigate the effects on the most vulnerable, and Singapore choosing the path of a mixture of these two methods (Washington Post, 2009).

According to Tai Hui, head of economic research for Southeast Asia at Standard Chartered Bank in Singapore, stimulus packages will work for the region's bigger economies, while probably having being less effective with the smaller economics. As for China and India, Tai Hui, thinks that stimulus packages will work well for both countries.

Then there is the issue of the growing problem or inclusion of buy-domestic provisions in the stimulus packages of both developing and developing countries. This is a problem that mostly associates with the protectionist consequences of buy-domestic provisions. 

As Daniella Markheim (2009) earlier observed, "Looming large in the stimulus package passed by the U.S. House of Representatives Wednesday--and currently under consideration in the U.S. Senate--is the expansion of 'Buy American' provisions that discriminate against foreign goods and services in U.S. government procurement." 

While the House legislation only focused on iron and steel products made in America being in public works projects that are funded by the stimulus package, notwithstanding domestic steel adding an amount great than 25 percent to project costs, the Senate, contra distinguishably, intends even more harsh restrictions, such as the banning of any imports in subsequent stimulus-funded projects. 

Markheim also rightly observed that protectionism is not the answer to American woes.

The "Buy America" rules also have international implications, especially in Sino-US trade relations. While Markheim (2009) urges the United States to lead by example, and to recognize the growing international interdependence of countries and their economies, the world judges America and its new variety of protectionist-trade policy, which is the legislative-enacted "Buy American" variety.

For instance, there are the Asian countries and economies, such as China.

Following announcement of the earlier announcement of the "Buy America" provision, on February 9, 2009, China's MOC publicly announced, "China won't resort to trade protectionism with a plan similar to "Buy America" that bans foreign products in domestic stimulus projects."

China earlier appeared to be taking the lead and attempting to set an example for global trade, while the United States appeared to be leaning toward protectionist-trade policy and barriers; a proclivity for which the untold consequences have yet to run.

For instance, since February 2009, there appears to be a China policy shift on the issue of buy-domestic provisions, which is a policy shift that might evidence growing protectionism.

As protectionism remains a persistent problem in global trade, there is now the growing concern with China electing to employ buy-domestic provisions. These growing concerns, more particularly, address the July 2009 inclusion into China's stimulus package of "Buy China" requirements.

The problems are obvious and succinctly stated by one economist as: "These require recipients of money from China's mammoth fiscal expansion to choose domestic suppliers 'unless products or services cannot be obtained in reasonable commercial conditions in China'. This sounds like out-and-out protectionism. But America, which included similar "Buy America" provisions in its own stimulus bill, may find it hard to raise a stink" (China Economics Blog, 2009).

Sources:

Johnson, Tim. 2009. Washington Post, S.E. Asia Faces Long-Term Trade Shift, Washington Post Foreign Service, February 7; Page A10.

Markheim, Daniella. 2009. Buy American Hurts America, WebMemo #2256, January 30.

WTO looking closely at Chinese trade restrictions, China Economics Blog, July 2, 2009.

Xinhua, 2009, China not to practice "Buy China", February 9.

Copyright © Protected - All Rights Reserved M. Ulric Killion, 2009.