China`s Provinces Trot Out `Buy Local` Campaigns

China`s Ministry of Commerce has been quick to warn against protectionism, especially the `Buy American` one.

Chinese provinces are scrambling to try to shore up local firms through mandates to buy locally, in a sign that the protectionism economists have warned about is not just an international issue.

China's Ministry of Commerce has been quick to warn against protectionism, especially the "Buy American" provision in the United States stimulus plan.

But in a series of policy announcements that could distort trade within China, provinces and cities with big automotive firms have been among the first to require that local government bureaus only buy cars produced in their province.

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The government of Anhui, a relatively poor province in eastern China, has one of the most specific "buy local" policies, according to a notice dated Feb 11.

Anhui ordered car manufacturers to buy steel from within the province. Construction and home appliance manufacturers must "cooperate" with local steel giant Ma'anshan Steel beginning in March, and power plants must buy coal from within Anhui from April onwards.

"Provincial governments are a bit nervous these days and may try to fall back on this type of planned approach," said Macquarie Research analyst Henry Liu, adding that local governments often try, and fail, to promote the local steel mill.

"But construction companies aren't stupid. They want the best price. Everyone works for a profit these days."

BEGGAR THY NEIGHBOUR

Economists warn that if countries adopt measures to protect their own companies, retaliatory measures could be triggered that would ultimately dry up global trade and worsen the impact of the downturn.

Indonesia, for instance, this week said it planned to order its nearly 4 million civil servants to use local products ranging from footwear to heavy machinery to help the economy weather the financial crisis.

In many Chinese provinces, the leading firms may be partly owned by the province, creating an incentive for provincial governments to protect their own as they struggle to maintain economic growth.

This type of local protectionism is not new in China, which is sometimes better understood as a series of regional or provincial markets, each with a population bigger than the largest European countries.

In 2001, China's cabinet outlawed local protectionism after the Shanghai government levied a 80,000 yuan ($11,700) fee on cars manufactured in Hubei province.

Hubei province once tried to levy a 70,000 yuan "poverty alleviation fee" on government departments if they bought cars from outside the province.

Provincial protectionism resurfaced during a coal shortage last winter, when many provinces issued local regulations forbidding the export of coal to their neighbours. That distorted the Chinese coal market and contributed to a price spike. ($1=6.837 Yuan)