Industries are starting to line up in Beijing, Brussels and Washington for import protection. That has happened in past downturns, too, but this time the restrictions may bite harder because of the global nature of the problems.

During the 1980s, Japan could afford not to retaliate against U.S. quotas on steel and automobiles because Tokyo’s economy was humming. There are no clear economic winners now, making it much harder for any government to turn the other cheek.

The global turn to stimulus spending also may come wrapped in protection, as each country tries to ensure that its industries benefit. In the U.S., congressional Democrats and their allies in steel, textile and organized labor are pushing to include strong “Buy America” provisions in a U.S. stimulus program that would limit spending to firms in the U.S. Already European officials are crying foul.(..)

Trade protection can deepen economic problems and shut off a potential engine of growth at a time when consumer demand and business investment are sagging globally. Already, the World Bank forecasts that global trade will shrink by 2.1% this year, the first decline since 1982.

While global trade deals have greatly reduced tariffs, they do little to fend off protection. Under World Trade Organization rules, countries establish formal tariff levels, which are often very high, and then apply lower tariffs. That gives them leeway to boost tariffs without violating WTO rules.

That’s starting to happen now. Ecuador announced in the fall that it was lifting tariffs across the board, increasing the levy on some imported meat to 85.5% from 25%. India raised tariffs on steel, while Russia, which isn’t a WTO member, boosted levies on imported cars.

Industries are also starting legal procedures at home to block competitors that get certain subsidies from their home government or that “dump” products abroad — meaning they sell at supposedly below-market prices. When a government approves a complaint, it imposes prohibitive tariffs. Retaliation is commonplace.(…)

According to the latest WTO survey, 16 countries launched 85 new antidumping cases during the first six months of 2008, compared with 61 investigations the year earlier. Expect a sharp rise in those numbers because the economic crisis deepened in the second half of the year. Almost half the complaints targeted China.

Other countries are finding different ways to block imports. Indonesia is requiring importers to get special licenses as a way to control imports of clothing, shoes and electronics. Mexico threatened to bar some meat imports from the U.S., which U.S. farmers viewed as retaliation for new rules requiring meat imported into the U.S. to be labeled by country. The U.S. and Mexico are trying to resolve the controversy.

“The surprising thing is how much room there is within the WTO framework to increase protection without overtly violating the agreement,” said Gary Hufbauer, a trade specialist at the Peterson Institute for International Economics, a free-trade think tank.

WTO rules don’t require government stimulus plans to be open to all bidders. Only a dozen countries, plus the European Union, have signed on to a WTO code aimed at ensuring that government purchases are open to foreign firms. Even those that sign the accord can take exceptions, as the U.S. has done for purchases by the Pentagon, and state and local governments. Much of the stimulus plan being concocted by President-elect Barack Obama could fall under Buy America provisions that don’t violate any WTO obligations<
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The Obama economic team hasn’t said how open it will make the plan to foreign bidders, or how it would deal with foreign governments that exclude U.S. firms. During the presidential campaign, Mr. Obama campaigned for a Buy American plan and attacked Republican Sen. John McCain for opposing restrictions on foreign firms.

Whatever Mr. Obama decides, Congress is bound to push for explicit Buy America provisions, which have broad bipartisan appeal The $25 billion auto-loan program approved late last year under the Bush administration was written in a way that largely excludes foreign auto transplants. That prompted a complaint by the head of the European Commission. Last week, House Transportation Committee Chairman James Oberstar, a Minnesota Democrat, unveiled an $85 billion infrastructure program that would require the steel, iron and manufactured goods used in the projects to be made in the U.S.

The only way to head off global protection is a global response. That would provide some political cover at home for governments that keep their markets open. For years, political leaders have been urging the completion of the tottering Doha global trade talks, although they haven’t made enough concessions to seal a deal. While a pact would be useful, it would take years to complete and wouldn’t close many WTO loopholes.

The April meeting of the so-called Group of 20 countries, which includes the most powerful industrial and developing nations, is a better forum to reach a common front against protection. When the group last met, in mid-November, it agreed to “refrain from raising new barriers” to trade or investment over the following 12 months. But a few days later, India increased tariffs on steel, iron and soybeans.

Thus, the assembled nations will have to do a lot better in keeping trade open or risk undermining their efforts to lift the global economy out of recession. “Pledges without rules don’t mean much,” said Rufus Yerxa, the WTO’s deputy director-general.

From WSJ. Emphasis added.

SHENZHEN, China — The global downturn is taking a particularly severe toll on China’s legions of dynamic small businesses, forcing them to adopt innovative, and sometimes desperate, strategies to survive.

Ye Jianqing, like many other Chinese entrepreneurs, has seen a sharp decline in orders from the U.S. and Europe, which account for most of his business. Last year, sales of the sunglasses his company, Wenzhou Zhenqing Glasses Co., makes dropped 80% to less than $300,000 from $1.5 million in 2007.

Fearing his eight-year-old business might not survive another year, Mr. Ye is switching gradually into new products, such as key rings and prescription eyewear. “If you’re not innovative and you don’t change yourself, you’re just waiting to die,” he says.

The fate of small businesses like Mr. Ye’s will help determine how the world’s third-largest economy rides out the current downturn, China’s worst since the Asian financial crisis a decade ago. According to rough official estimates, the private sector, which is primarily small businesses, accounts for close to 60% of China’s economic output, and employs three-quarters of the urban work force. That’s a big turnaround from just a decade ago, when stodgy and poorly run state enterprises dominated the economy.

Entrepreneurial activity hasn’t ground to a halt. In Guangdong province, a manufacturing and trade hub, 62,400 companies shut down in 2008, according to government records. But 100,600 companies were started, resulting in a net increase of 38,200 companies.

There are many benefits to the rise of small business. “The Chinese economy is a lot more flexible today than in the 1990s,” says Arthur Kroeber, managing director of Dragonomics Research & Advisory in Beijing. “Private firms can shift from unprofitable to profitable lines of business, and adjust their wage and other costs, much more quickly.”

But many small companies survive on the business of just a few clients, or sell very low-margin products; they could be forced to close if a big client suddenly delays orders, or when they don’t plan ahead for currency fluctuations. Bigger businesses are more cushioned from such effects.

(…)The economic importance of China’s small businesses is getting some recognition from the government. Officials have instructed banks since the fall to lend more to small
er companies. But it isn’t yet clear how much of the rebound in bank lending in the final months of 2008 — it rose 18.8% year-to-year in December — went to small business. Many analysts suspect the big state firms that banks have long favored were still the main beneficiaries.

Small businesses’ attempts to survive can come at the expense of workers, who have little bargaining power with bosses. Though new labor legislation that came into force last year was intended to strengthen worker protections, it remains easy for private companies to hire and fire in China. Chinese officials have been trying to prevent such layoffs recently, but some factory owners are simply walking away as things get bad, leaving workers without pay.(…)

The flexibility to fire workers could well be accelerating China’s downturn now — but it may mean managers can move equally quickly to ramp up again in a recovery. “In a very cold-blooded economists’ way of talking, it means the labor market has maximum flexibility,” says Qu Hongbin, an economist with HSBC in Hong Kong. “When it comes to surviving the downturn, those things are a plus, though they are negative from a moral perspective.”(…)

From WSJ