Wednesday, February 4, 2009

Local Protectionism Rears Its Ugly Head

An excellent article in the 21st Century Business Herald outlines an increasing number of local protectionist policies that are beginning to pop up all over China.

Local protectionism, or policies that encourage purchasing locally-made products (or discourage buying products from elsewhere) used to be a problem in China that received a lot of attention in the 1980s and '90s, but it hasn't received much press over the past decade or so. Perhaps that was because the long bull market brought enough of a rising tide to lift all boats.

To quote Warren Buffet (and mix my metaphor somewhat), now that the tide is receding, we can see who has been swimming naked. A lot of local regions desperate to bolster their economies are enacting policies to keep as much money as possible at home. Unfortunately, even some who had been wearing swimming trunks are also joining in the beggar-thy-neighbor games.

According to the article:
  • The City of Hangzhou is adding 5 percent on top of the already announced 13 percent "home appliances to the countryside" rebates -- but only for purchasing local brands.
  • The City of Changchun is waiving new car inspection fees, but only for cars made by First Auto Works which just happens to be headquartered in Changchun. They are also requiring that no less than 50 percent of equipment purchases for large projects be of locally-made equipment. And they are adding a further 10 percent subsidy to the Central Government's subsidy for tractors and farm equipment made locally.
  • An Anhui Province internal document obtained by a reporter contains the following provisions:
  1. Infrastructure projects should use equipment made in Anhui Province
  2. Anhui party and government organizations, as well as city taxi companies, should buy cars made in Anhui. (Cars made by Chery and Jianghuai, two Anhui auto manufacturers, are specifically mentioned.)
  3. Enterprises in Anhui, especially in the auto and home appliance industries, are instructed to use steel produced in Anhui.
  4. Anhui government projects are instructed to use Anhui-produced steel, concrete, doors and windows, glass, wiring and electrical equipment.
  5. Anhui energy producers are to purchase coal from Anhui.
  6. Promotion of Anhui-produced tobacco and alcohol products.
  7. Purchases made by all levels of government are to be of Anhui products.
  8. In implementing the Central Government's "home appliances to the countryside" policy, Anhui-made farm equipment and fertilizer are to be promoted. (Which seems a strange directive given that the policy is intended to promote purchases of "home appliances" -- hence the name -- not farm equipment.)
When asked whether this policy amounted to local protectionism, an official of the Anhui provincial economic commission stated that this only applies to state and public institutions. For privately owned enterprises, they are "only advocating" purchase of locally-made goods (emphasis added). He further noted that, "our cement industry is very well developed, so giving priority to buying this province's cement is not a bad thing".

But all is not lost. Apparently some people have been listening to economists (or at least to their own common sense).

At the beginning of the year, the City of Wuhan's draft government work report contained a provision recommending that plans be drawn up to encourage consumers to buy products made in Wuhan. After discussion, this provision was excised from the final document as some believed the government "should not use the excuse of the financial crisis to violate the market economy by intervening".

Apparently the Central Government is powerful enough to stiff-arm Chongqing's attempt to stimulate its local real estate market. Is it strong enough to stop the self-destructive spiral of local protectionism?