Protectionism: Impact and Response by Industry

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1 Protectionism: Impact and Response by Industry JUNG Ho-Sung Research Fellow, Samsung Economic Research Institute Weekly Insight I. Background to Rising Protectionism Economic difficulties continue to mount with the global economy in deep recession. Most industrialized nations posted negative real GDP growth in the fourth quarter of 2008: -6.2% in the US, -5.9% in Europe and -12.7% in Japan. With such synchronized declines in demand, exports are shrinking at a precipitous rate; US and German exports fell 13% and 19% year-on-year, respectively, in December Such a broad and dramatic collapse in demand and output has given rise to a severe and far-reaching deterioration of the employment environment. Unemployment rose to as high as 7.6% in the US and 8.2% in the Euro area in January 2009 and is still on the way up. In today s interlocked global economy, this trend can only spread to other developed and developing countries. Indeed, anti-government protests are being held in many countries like Brazil, calling for policies to stabilize employment. In turn, political pressure for governments to adopt protectionist measures is rising. While industrialized nations have resorted to repeated injections of public funds to prop up distressed financial institutions and the automobile industry, emerging nations have invoked 38 regulatory trade measures just in the first two months of 2009 that address anti-dumping, countervailing taxes and safeguards. II. Future Outlook The global economy has yet to hit bottom; the cycle of credit squeeze, falling demand and exports, deteriorating employment and further falls in demand and exports has some way still to run. So supporters of protectionism will more likely continue to gain ground. This has been true in past cases of economic downturn as well. Most countries, when facing severe downturns, have tended to adopt more protectionist measures. For example, although the US advocated free trade until the 1960s, it resorted to various protectionist measures during each of the four US recessions since the 1970s. Still, it seems highly unlikely that protectionism will become as rampant as it did during the Great Depression. There is now a general consensus that protectionism based on the short-term interests of a particular country will trigger a collapse of the entire global economy. Indeed, countries around the world are trying to guard against a proliferation of protectionism. The G7 and G20 summits have both reached a consensus that protectionism is undesirable and dangerous. Also, unlike in the past, there now exist international mediators such as the World Trade Organization (WTO) that can help prevent rising protectionism from turning into bitter trade conflicts. Nevertheless, while countries are not likely to resort to blatant protectionist measures such as raising tariffs or non-tariff barriers, it is quite possible that they will turn to less transparent forms of protectionism such as favoring domestic companies when providing financial support. Even after the protests against the Buy American element of the US economic stimulus package, there is a possibility that supportive measures will not be equally beneficial to domestic and foreign companies. Other forms of indirect protectionist measures could be connected with labor and the environment. For example, the US is adopting employment protectionism that prioritizes the employment of its own people (i.e., the Sanders/Grassley amendment). 1 The European Union and other developed economies are also employing the indirect protectionist method of applying relatively high environmental/safety standards to imported items (i.e., Registration, Evaluation, Authorization and Restriction of Chemicals, a.k.a. REACH). There are also concerns over possible financial protectionism, where financial support is extended only to domestic financial companies or on the condition that loans are extended only to domestic companies. In this vein, there are concerns in some circles that East- 1 A provision that saddles TARP (Troubled Asset Relief Program) fund recipients with strict regulations on hiring foreign workers under H-1B visas. 10

2 March 9, 2009 Average Tariff Rate and Economic Growth Rate of the US Average Tariff Rate Nixon Shock (1971) (New Economic Policy) Enactment of Trade Act (1974) (Super 301) Trade and Tariff Act *(1984) Steel Safeguard (2002) (Unit: %) 10 Economic Growth Rate Note: 1. * United States Trade Representatives (USTR) was empowered to take retaliatory action against foreign countries. 2. Average tariff rate = tariff income/import coverage. 3. Four divided areas refer to the economic recessions that the US faced since the 1970s. Source: United States Trade Representative. ern Europe s recent financial and economic turmoil has been exacerbated by Western European banks tendency to withdraw funding to the region while at the same time increasing loans within Western Europe. III. Protectionist Pressure by Nation and Industry To properly grasp the impact that protectionism may have on Korea s export industry, it is necessary to analyze both the situation in each of Korea s major trading partners and also the situation in the various different industries. This is because a tendency to resort to protectionism will depend on the severity of business and employment conditions in a particular country or industry. For example, even in the same country, pressure to adopt protectionist measures can vary significantly between industries depending on the situation in each of those industries. As a case in point, the US textile industry advocates protectionism, whereas US IT and telecommunications industries have stood by free trade. 2 Samsung Economic Research Institute (SERI) has developed an index, the Trade Protection Pressure Index (TPPI), which can take proper account of the pressure for greater protectionism that varies by country and industry. 2 The National Council of Textile Organizations calls for a swift adoption of regulatory measures on Chinese textile imports whereas the US Telecom Association insists on a fair and open trade policy to enhance international market competitiveness. Samsung Economic Research Institute 11

3 Trade Protection Pressure Index by Country and Industry (2009) Shipbuilding Petrochemicals Automobiles Wireless Telecommunications Semiconductors LCDs Steel Textiles Average China EU US ASEAN Japan Taiwan BRIs Average Note: 1. Items are based on 4HS (Harmonized Commodity Description and Coding System). 2. Dark gray, light gray and white refer to high-risk, medium-risk and low-risk, respectively. Source: Samsung Economic Research Institute. TPPI = (current level of protectionism in a country potential level of protectionism in each industry) + (factors that lead to greater potential protectionism in each country and industry) To represent the current level of protectionism in each country, the World Bank s Trade Restrictiveness Index (TRI) was used (based on 2008 data). Rather than just using an average tariff rate, the TRI takes both tariffs and non-tariff barriers into account, and also uses weights to properly evaluate the effective trade barrier. However, it does not take into account the differences across industries within a particular country. The potential level of protectionism in each industry is represented by multiplying the share of an industry in a country s total imports with the ratio of the country s imports over exports for that industry. 3 In this way, the TPPI shows that pressure for protectionism is likely to rise if imports make up a large share of total supply of a particular product or if imports of a product are large relative to exports of the same product. As for factors that increase the potential for protectionism for a country or industry, five variables were taken into consideration: the unemployment rate, the share of manufacturing in total employment, the ability to raise tariffs and the rate of newly-adopted importrestricting measures by country and industry. The final TPPI is then calculated after standardizing the value of the five variables and combining them into current protectionism levels for each country and industry. 3 Even if a country imports heavily from a particular industry, it has fewer inducements to strengthen protectionism if it exports heavily. SERI calculated the TPPI of Korea s seven major export partners and eight major export industries by country and industry (2008). The results were then classified depending on risk intensity. 4 Those with an average TPPI (for the country or industry) exceeding 0.25 were in the high-risk group, those between 0.15 and 0.25 in the medium-risk group and those below 0.15 in the lowrisk group. For the TPPI that considers both national and industrial factors, those with over 0.6, between 0.3 and 0.6, and below 0.3 were categorized into high-risk, medium-risk and low-risk groups, respectively. In the analysis of protectionism by country, BRIs (Brazil, Russia, India), the EU and China belonged to the highrisk group. The TPPI for BRIs was 0.54, the EU 0.30 and China 0.29, suggesting that there is some probability that EU and China could take protectionist steps. In the analysis of protectionism by industry, petrochemicals and steel fell into the high-risk group. The former result is likely to reflect that, owing to overinvestment, there is a fair amount of oversupply in petrochemicals (particularly from China and India). Indeed, China is considering an increase in import tariffs for petrochemical products from 1% to 5% (as of December 2008). India, which has been expanding its petrochemical sector, will likely invoke safeguards on mousse phthalic acid, an emulsifier product. Steel likely to benefit from higher demand coming from increased SOC investment that many govern- 4 Among export partners, Brazil, Russia and India were bundled as the BRI economic zone considering that they are emerging nations with strengthening protectionism sentiment. The textile industry (ranking 10th in exports) was included in the top seven industries as it is subject to numerous regulations. 12

4 March 9, 2009 Protectionism Risk High Quadrant Ⅱ US-wireless telecommunications (750) China-LCDs (570) ASEAN-steel (230) (Unit: US$100 million) Quadrant Ⅰ China-petrochemicals (300) Export BRIs-automobiles (50) China-automobiles (40) EU-textiles (90) BRIs-wireless telecommunications (80) BRIspetrochemicals (50) Low Quadrant Ⅲ Low-Risk Protectionist Pressure Note: The size of each circle refers to export size for given countries (based on January 2009). Quadrant Ⅳ High-Risk ments are pursuing in an effort to boost the economy also belongs to the high-risk group. 5 Due to increasing tensions between major importers (such as the US, the EU, Russia and India) and exporters (such as China and Canada), the steel industry clearly has the potential for trade disputes. Major exporters are forecast to assume the offensive, readying themselves against import-restricting measures by the US among others. IV. Impact on Korean Exports By looking at both the intensity of protectionist pressure and the share of each industry in total Korean exports, SERI analyzed the impact that worldwide protectionism would have on Korea. The greatest impact would be on Korean industries with a high export share and facing a high level of protectionism pressure (quadrant I in table below): these would include petrochemicals exports to China and automobiles exports to BRIs. Industries in quadrant II have high export shares but face a good probability of rising protectionist pressure. For example, both wireless telecommunications vis-àvis the US and ships vis-à-vis the EU currently have large export weights and face a relatively low protectionist 5 Petrochemicals and steel are Korea s second and seventh most exported items in sentiment. Yet, precautions must be made against indirect protectionism measures. For wireless telecommunications, for example, tariffs may be increased through a revision of product classification standards. Industries in quadrant IV had small export weights but required more effort to promote exports as they presently face high levels of protection: namely petrochemicals for BRIs and textiles for the EU. So, there is rightly concern over how the spread of protectionism will impact Korean exports, as countries in the high-risk group (such as BRIs, the EU and China) account for 41.3% of Korea s total exports (as of 2008). V. Implications To the extent that Korea s major trading partners may be adopting an increasingly protectionist stance and protectionist pressures may be rising particularly in those products that make up the bulk of Korea s exports, there is a need for the Korean government and not just Korean exporters to take decisive action. Naturally, Korea should exert leadership, as co-chair of the Group of 20 nations, in leading the effort to push back protectionist tendencies. It goes without saying that it should itself refrain from raising any protectionist barriers that could trigger trade disputes, but it should Samsung Economic Research Institute 13

5 also set up a comprehensive monitoring and management system to both prevent developments that could raise protectionist tensions as well as defuse such tensions once they arise. For their part, Korean companies should cooperate closely with the government in the monitoring of items/situations where protectionist tensions could escalate and make strenuous efforts to make investment in R&D to overcome indirect trade barriers linked to environmental and technological regulations.seri 14