As the global supply chain moves away from China, we should not forget the impact on domestic players.
Post Covid-19, we can expect increasing clamour for protectionism across the world as the global value chains collapse, partly because of prolonged disruptions and partly due to a dent in trust in the value chain originating in China.
Japan has already announced a package for pulling out its manufacturing activities from China, and the US is likely to follow suit. That would give a death blow to the global supply chains and lay the foundation for a more inward-looking trade regime
Demand for Protectionism
We can expect the demand for protection across major sectors through various tariff and non-tariff barriers in many countries. Some demands for protection may be genuine and legitimate in the face of global imbalance in capacities. But many such demands will be aimed at creating monopolies or duopolies or in response to a temporary increase in import volumes.
While most manufacturing sectors across the globe came to a halt as governments enforced lockdowns, there are reports that China is stock-piling inventory to reach out to global industrial consumers once the shutdowns are lifted.
Increase in imports
With supply chains and labour force completely disrupted, industries will be looking for raw materials and intermediates to be able to restart operations, post COVID-19 lockdowns. This will lead to increased imports. At the same time, the producers of basic building blocks and intermediates as well as finished products will clamour for protection on the face of heightened fear of large-scale imports.
The China factor will be played out in full force to drive the demand for protection. Shrinking global market will also be a critical factor.
This conflicting demand for basic raw materials and intermediates on the one hand and the demand for protection against imports on the other will pose an exceedingly difficult policy challenge for the policymakers.
There is no denying the fact that we need to ramp up our own capacities to avoid situations where some industries are almost completely dependent upon certain supplies from China.
However, it will take some time to build those capacities and the consuming industry will need the inputs at competitive prices immediately. Therefore, there is a need to maintain the line of supply without significant price and volume distortion. Chinese inventories will be required in many countries.
In some sectors, the entire value chain attracts duty, thereby completely pricing out the finished good producers both for the domestic and international markets. Instead of improving its efficiency and competitiveness, the industry often clamours for protection, even in a monopolistic or duopolistic situation.
Downstream producers, largely MSMEs, use these goods as their input for further processing. By increasing the cost of the basic inputs through prohibitive duties, the downstream industries are put in a serious disadvantage and they are priced out in domestic and export markets.
Trade remedy measures are distributive in nature and act as safeguards against unfair trade or injurious imports and are meant to create a level playing field. But they can also be highly distortive and damaging for the domestic economy and global trade if indiscriminately used.
Therefore, in the overall economy’s interest, the response of the government should be well thought out and nuanced rather than succumbing to the rhetoric for protection in the changed global economic scenario.