Time for infusing some protectionism

5 Jan 2009, 0134 hrs IST, ET Bureau





Kumar Mangalam Birla, chairman of the $28 billion Aditya Birla group, was asked recently to spell out the single most important thing he wanted
the government to do. “Levy tariffs and protect the domestic industry,” said Mr Birla without batting an eyelid.

Surprising it may sound as it comes from the head of a group which depends on overseas businesses for more than 50% of its revenues, but he was just reflecting the general mood of India’s business community.


With the largest economies of the world coming under the grip of a recession, the clamour for protectionist measures is bound to become louder. In fact, a number of corporate leaders have already sought higher import duties to protect local players from cheap imports from countries such as Russia, Ukraine and China. With their major markets – the US, Europe and Japan – shrinking due to recession, exporters from these countries are left with no option but to liquidate their inventories at any cost.


“The threat is real,” says YM Deosthalee, finance director at Larsen & Toubro, India’s largest engineering company. “If the government wants India to grow, then protectionist measures are vital,” he said. Mr Deosthalee should know. The Indian power equipment industry, where companies such as L&T and the state-run Bhel are the dominant players, is facing a major threat from Chinese players.


Cheap imports from China are flooding the Indian market for both mega- and medium-sized power plant equipment. Chinese companies such as Dong-fang Electric, Shanghai Electric and Harbin Power Equipment have already bagged orders worth Rs 18,000 crore from the West Bengal government, Anil Ambani’s Reliance Infrastructure and Anil Agarwal’s Sterlite Industries in the past two years. “Bhel would be wiped off in five years if the government doesn’t levy an import duty of 15% on Chinese power equip-ment," said Bhel chairman K Ravi Kumar.


“The threat is more in the metals sector,” says SR Venkatapathy, research head at ARC Advisory Group, a leading research and advisory firm for manufacturing, energy and supply chain industries. “Chinese steel mills are left with unsold steel products and are hence dumping their products in our markets,” he added.


The numbers back these claims. According to the Joint Plant Committee, a state-owned body that releases figures on exports and imports, steel imports into India grew by more than 70% to 1.4 million tonne in November, compared to the same month last year. The rise in imports was mainly due to low-priced steel products from China, Thailand and Ukraine that entered India at $450-500 per tonne, about 25% lower than global steel prices.


“The government should raise the import duty to at least 10%," says Essar group director Jatin Mehra. "The foreign steel coming into India is at least $80 per tonne cheaper than the prices prevail in those countries,” he added. India currently levies 5% customs duty on steel.


Indian companies are seeking protection, fully aware of its likely impact on global trade. “In any case, there has been a sharp fall in global trade ever since the liquidity crisis started,” said Mr Deosthalee. “There should be a two-pronged strategy to tackle this – raise customs duties and levy lower duties in the local market,” he added.


There is already talk about reviving the fabled Bombay Club, which was formed in 1940s to press for protecting the nascent Indian industry. Such noises were also heard in 1990s when India was beginning to globalise. The challeng

The Winds of Protectionism Are Gaining Strength

Michael J. Panzner , Michael J. Panzner

Published 01.06.2009 10:52 GMT



Although history never quite repeats itself, some patterns remain the same.

During the boom times, there is widespread and growing support for open borders and ever expanding cross-border commerce. However, when the economic pendulum swings the other way, so does faith in free trade.


Thus, it should come as no surprise, as the following Reuters report, "Obama, Congress Leaders to Meet Monday on Economy," seems to make clear [in the paragraphs I've highlighted in bold italic], that the winds of protectionism are gaining strength.


Both President-elect Barack Obama and Vice President-elect Joe Biden will huddle with Democratic and Republican congressional leaders on Monday to try to advance a huge economic stimulus bill that Obama hopes can be enacted quickly, despite Republican reservations.

Obama's transition team said it is mulling "buy American" provisions for the stimulus package that could favor U.S. companies over foreign competitors.

Leadership aides in Congress said Obama's meeting is set to begin around 3 p.m. EST (2000 GMT) on Monday.

But in the run-up to the meeting, Republicans on Capitol Hill were warning their Democratic counterparts that legislation to improve the worsening U.S. economy should not spend too much money on government-funded projects and should not be rushed through Congress without adequate review.

Democrats have been hoping to deliver the plan -- which could cost $675 billion to $775 billion or more -- to Obama on Jan. 20, the day he becomes president, or shortly thereafter.


One element of the plan could be "buy American" language benefiting U.S. industry. "We are reviewing the buy American proposal and we are committed to a plan that will save or create 3 million jobs including jobs in manufacturing," Obama transition spokeswoman Jen Psaki said by e-mail.


The New York Times on Friday quoted Daniel DiMicco, chairman and chief executive of steel maker Nucor Corp, as saying the steel industry was asking Obama to "deal with the worst economic slowdown in our lifetime through a recovery program that has in every provision a 'buy America' clause."


The newly elected Congress is to be sworn in on Tuesday -- two weeks before Obama. Hearings could push a final package well into February.


The Democrats, who have a majority in Congress, want the economic stimulus to include tax relief for the middle class and spending on schools, roads and other infrastructure. States, which increasingly are having difficulties paying health care costs for the poor, also would get federal money.



$1 TRILLION?


But Republicans have voiced concern about possible waste and say the tab could reach $1 trillion.

"I am concerned by media reports that suggest the Democrats' emerging proposal may cost taxpayers up to 1 trillion in new government spending, with little debate or public scrutiny of the still-unseen legislation," House Republican Leader John Boehner said in a statement on Friday.

"Let's be clear: it is essential that this legislation be debated in a fair, open, and honest way," he said.

At least five Democratic governors say $1 trillion is necessary. The five, from New York, New Jersey, Massachusetts, Ohio and Wisconsin, said on a conference call on Friday they would like the package to include $250 billion for education funding, $250 billion for social services such as the Medicaid health insurance program, and $500 billion for infrastructure.

Massachusetts Gov. Deval Patrick said infrastructure should be defined to include public housing, the power grid, and electronic medical records as well as roads and bridges.

Although the Democrats increased their majority in the 100-member Senate in the November election, they still need Republican support to advance legislation.

A Senate Republican aide, who asked not to be identified, said Democrats could gain stronger, bipartisan support with an economic stimulus measure costing less -- about $500 billion.

Global financial markets rallied on Friday, partly due to hope that a stimulus bill will move through Congress soon.

The meeting with Obama and Biden would include nine leaders from the Senate and House of Representatives, including House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, both Democrats. Republicans attending would include Boehner and Senate Minority Leader Mitch McConnell, aides said.

Republicans said although their numbers in the Senate and House were depleted in the election that brought Obama to power, they would not rubber-stamp a huge new spending plan.

"We hope that Democrats in Congress don't attempt to shut the American taxpayer out of this process by trying to pass a bill that hasn't been the subject of bipartisan review and that hasn't been available for public inspection," McConnell said in a statement on Friday.

He and Boehner have called for extensive hearings to scrutinize the economic plan.