By Marcos Troyjo

As global capitalism struggles to find a way out of an existential crisis, a strong trend is showing its face in the world economy. Against a backdrop of great uncertainty, countries are increasingly adopting industrial and trade policies based on a notion we can call “local-contentism”.

The practice is becoming the most recurrent tool in bulking up a nation’s capacity to compete in world trade and attract investment. But it carries a heavy price tag.

We are experiencing far more than just “currency wars”. Exchange-rate tactics make for ancillary rather than decisive battles. The world has set the stage for the waging of “clashes for competitiveness”.

Many confuse local-contentism with defensive trade measures erected against artificial exchange-rate stratagems that boost the attractiveness of a country’s exports.

There are clear differences however between local-contentism and old-school protectionism. While the latter is essentially about import quotas and tariff barriers set up to protect what is “national”, the former idolises foreign direct investment and makes extensive use of government procurements as bait. After all, by its very definition, local-contentism is all about being “local”, not necessarily “national”.

In Latin America, successful local-content policies enacted by Brazil and Peru, for example, have parted ways with traditional forms of xenophobic protectionism that plagued the region during much of the twentieth century. The economic translation of “Bolivarianism”, for example, means basically the nationalisation of industrial assets, as if wealth resided in possessing physical facilities, not in people’s talents or knowledge-intensive processes.

But the recent move towards local-contentism is also visible on radar screens in the US and Europe. This year’s presidential campaigns in America and France are not centred on free markets or enhanced regional economic integration. They focus instead on the job creation side of local-contentism.

Nevertheless, ever-louder American and European voices are being raised against the way China manages its exchange rate. They aim at spreading the notion that an undervalued currency is the most important factor in China’s competitiveness. They miss the point. Blaming the Chinese currency is no more than political discourse targeted at voters.

China’s hyper-competitiveness is the supreme example of intricate, sophisticated policies of local-contentism, which since 1978 have included:

- PPPs (public-private partnerships) as a springboard for exports and attracting foreign direct investment;

- the (still) low cost of China’s domestic factors of production;

- privileged access to the world’s most importantant buying markets; and

- a vigorous business diplomacy, which reportedly results in two separate Chinese trade and investment missions visiting to the US and Europe every day.

Instead of examining how China became a champion of local-contentism, until recently the US and Europe looked for allies in their criticism of China’s currency in multilateral fora, hoping, for example, for Brazil’s endorsement.

Yet it would be wrong to describe any (growing) criticism by Brazil of China’s economic policies as simply a way of “sharing the view of the US and Europe”. Brazil has major concerns of its own over how the rise of China contributes to the “deindustrialisation” of its economy.

Nevertheless, Brazil has been able to partially offset its China-led deindustrialisation by “reindustrialising” through its own version of local-contentism. One of the reasons Brazil has been able to accumulate enough capital to foster local content is that China has overtaken the US and European Union as Brazil’s top trading partner and major source of FDI.

China’s appetite for agricultural and mineral commodities, where Brazil has competitive advantages, has automatically extended economic cooperation to other areas (logistics, infrastructure, aircraft and others). Added to this is mutual good will seen in Brazil’s moves towards recognizing China as a “market economy” (although this has not been formalised) in exchange for Chinese support for Brazil’s bid to become a permanent member of the UN Security Council (not formalised either) and in China’s opening up to Brazilian exports of beef and poultry.

Brazilian manufacturers who worry deeply about a “flood” of Chinese goods into the Brazilian market would doubtless appreciate the government taking action in the form of quotas and other import restrictions.

However, they are less critical of China’s exchange rate policies and more vocal in denouncing Brazil’s outdated and non-competitive labour and fiscal laws, shortage of domestic infrastructure and high interest rates, which hurt Brazil’s domestic and international competitiveness more than the overvalued real or China’ s cheap renminbi.

If, on the one hand, local-contentism is a pillar upon which China built its current economic might, on the other it is also one of the concepts countries are now implementing to fight China’s hyper-competitiveness.

As a consequence, we may see fewer “Made in the World” goods coming from “network-corporations” that in the heyday of globalization combined worldwide logistics, supply chains and talent pools to achieve productivity gains, and more of these processes taking place simultaneously in a single country.

Even China, which based its prosperity on a “trading nation” strategy, will have to model its local-contentism not so much on the way it sells to the world, but rather on how China buys from the world. Major contracts by China’s government, corporations and consumers as buyers will have to support activities carried out locally, generating local jobs and taxes.

Although local-contentism can benefit one nation or another for a number of years, the global economy will pay a heavy price for the loss of efficiency it entails. If instead of playing a part in a country’s catching up strategy local-contentism becomes an across-the-board philosophy for our times, we can only expect ever-growing economic imbalances and further international inequality.

Marcos Troyjo is director of the BRICLab at Columbia University, where he teaches international affairs

Related reading:
12 for 2012: Brazil’s import substitution industrialisation 2.0, beyondbrics
Fears rise of global protectionism, FT
Brazil gets protectionist on auto, beyondbrics
Nissan points the headlights at Brazil, beyondbrics
Fiat reveals plans for production in Russia, FT

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