Protectionism & the Chinese Economy

Asian nations have been hesitant to erect tariff barriers against the low-cost imports flooding in – especially in countries like Indonesia, India, South Korea and Thailand. The “free trade” mantra has largely been taken to heart.

Meanwhile the US and the EU have recently broadened their tariff regimes to include electric vehicles and battery packs being exported by China.

The challenges faced by Asia's economies from China's industrial overcapacity are only increased by those tariffs, with Chinese manufacturers of EV’s eyeing the developing market possibilities across Asia.

Official date from China shows more than 300 thousand EV’s have been shipped to Asian markets in the last year, and while every Ev on an Asian highway is a win for the environment, the damage done to domestic manufacturers can be significant.

But while the US and EU tariffs take their toll in China, the increased production of some goods is simply re-directed to new markets, and into competition with other imports from across the region, including New Zealand.

Considering this developing situation, Asian governments are pondering the possibility of erecting their own tariff barriers to protect jobs and livelihoods.

But it’s a complex area – with many nations significantly integrated into the Chinese economy and without viable alternative markets. Almost all the ASEAN nations have key trading relationships with China, depending on imports of raw materials and machine parts for their own exports.

While protectionism is generally dismissed as old-fashioned and unhelpful by trade analysts, there are small signs that things may move that way. Thailand’s new 7% VAT on imported goods retailing for less than 1500 Baht ($70NZ).

Opponents argue that trade protectionism will lead to higher consumer prices, retaliation from trading partners, and reduced economic growth, all factors Thailand has no doubt considered, and sees as worthwhile risks, while it continues to develop its own manufacturing sector.

Thailand’s manufacturing sector is highly diversified, encompassing a wide range of industries including automotive, electronics, petrochemicals, textiles and garments, food processing, and machinery. The standout is automotive manufacturing. Thailand is one of the largest automotive producers in Southeast Asia and a major exporter of vehicles and automotive parts.

Protecting that sector is paramount. The Thai government offers various investment incentives to attract foreign automakers and automotive parts manufacturers. These incentives include tax holidays, reduced corporate income tax rates, import duty exemptions on machinery and raw materials, and other financial incentives.

Thailand has also developed extensive infrastructure to support its automotive industry, including industrial estates, logistics networks, and ports. Its “Eastern Economic Corridor” project is a case in point.

Asian governments can also favour local producers with subsidies or tax incentives, but also look to diversify. 
South Korea's Ministry of Trade, Industry and Energy announced its 3050 Strategy late last year, detailing an extensive list of items it intends to reduce import dependence to 50% by 2030.

As western economies move to protect themselves from a surging Chinese economy, there is also the immediate opportunity for an increase in foreign direct investment.

The re-focused protectionism against China coming from the west is creating new economic challenges for Asia, where governments are considering reaching for their own levers to protect local incomes and manufacturing sectors.

-Asia Media Centre