Executives: Trade, not protectionism

Michael Alan Hamlin

Posted on May 20, 2009

The results of the latest McKinsey Quarterly survey (subscription required) on economic conditions in the view of senior executives around the world suggest that the global economy may be turning the corner. Almost 25% of respondents “expect their nations’ economies to be in better shape by the end of June-significantly more than thought that six weeks ago.” A significant number, 35%, expect an overall upturn by the end of the year.

Philippine business should find reason to cheer these results. If the global economy is turning around, demand for exports will swell, job creation will increase resulting in even higher remittances, and investment (such as it is) should begin to recover. Sectors that have been pushing for support of local products in the form of high tariffs on imported products, such as the Federation of Philippine Industries, won’t be pleased with the results of the survey, however.

That’s because respondents in every region and industry believe that protectionism is ultimately harmful to national economies. In fact, only four percent of respondents see protectionism as helpful even to their individual companies. Executives of Mariwasa SIAM Holdings, Inc. and regulators should take note of this sentiment. The company, a joint venture between the Co Seteng family and Thailand’s Siam Cement Group, reportedly convinced government last year to levy a P2-per-kilogram duty on imported tiles for four years.

Government went even further, requiring importers of competing products to obtain a product certification before being sold locally. In return, Mariwasa promised to invest in energy-saving equipment to make it more competitive. It’s not clear whether it has started to keep that promise, but the company submitted financial statements to the Philippine Stock Exchange last week indicating that it has returned to profitability as a result of increased sales thanks to the tariff and reduced energy costs thanks to the crisis.

Is this an example of protectionist policies working for the good of local industry? The majority of respondents to the McKinsey survey would disagree, and the reasons seem obvious. Although Mariwasa is protected in the Philippines from “cheap” imports, ironically it exports its own products to Thailand, Korea, Australia, and Indonesia and expects to expand to Guam, South Africa, and Singapore. According to reports, exports account for three quarters of its net revenue.

This is an alarming scenario on a number of levels. First, Filipino consumers are being forced to pay higher prices for tiles so that this joint venture can protect its relatively small home market. As a result, Filipino consumers are effectively subsidizing the company’s exports by making it possible to sell tiles more cheaply to export markets than the company could without protection from competitive pressure at home.

Since turnabout is fair game, it is entirely reasonable to assume that Mariwasa’s competitors in its export markets will seek protection against the company. Unless the company has significantly improved its efficiency while under protection, it is unlikely that it can continue to profitably export to these markets if that happens. The bottom line is that Mariwasa and other companies in similar situations, which rely on exports for most of their revenue, should be fighting protectionism, not, perversely, lobbying for it.

Respondents to the McKinsey survey see the value in international trade despite the crisis. “Strong majorities of executives in all regions believe regulations to restrict imports and exports would damage their countries’ economies; the global average is 73%.” However, less than 40% actually thought protectionist policies in export markets would harm their companies, suggesting that respondents are confident in the quality and appeal of the products they produce. Again, only four percent of respondents said they believe that trade restrictions would improve their companies’ financial positions.

Mariwasa, according to reports, sought protection from cheap imports from China. China is emerging as an important export market for the Philippines and it will become even more important in the next year. Over half of the survey respondents in China expect their economy to be in better shape this year and 71% of all respondents expect China to emerge economically stronger from the crisis. Meanwhile, more than half of respondents predict the United States-the Philippines’ largest trading partner-will emerge weaker.

For government policy makers and the Philippine business community alike, it clearly makes little sense to antagonize trading partners, especially in a time of crisis. If the respondents to the survey are correct and protectionism is actually counterproductive, then any effort to manipulate the market and protect poorly run companies seems hugely boneheaded. That’s especially so when the Filipino consumer winds up paying the price.

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