Minimising the impact of protectionism on construction

11 September 2018

As protectionism gains pace around the globe, we look at the effect some policies are having on construction companies working across multiple territories.

A growing tide of protectionism is sweeping over the world. From the UK’s vote to leave the European Union, to the combative talks held at this year’s G7 Summit, an anti-globalisation rhetoric has become difficult to avoid.

A product of the 2008 financial crisis – when countries lost confidence in free markets – the number of harmful trade measures rose by more than 6,000 between 2009 and 2015, according to data by law firm Gowling WLG.

As the European Central Bank reiterates: “There are signs that the anti-globalisation sentiment that has become more pervasive since the crisis has begun to be translated into actual policy measures.”

So, with this in mind, which protectionist policies are having an impact on the construction industry? And how are they affecting contractors in different corners of the world?

The impact of Brexit on the construction industry

The UK’s decision to leave the European Union on 23 June 2016 has unsurprisingly been a key factor in its trade outlook.

The UK’s future position within the single market and customs union, for example, provoked strong words from the likes of former chancellor George Osborne.

In February 2017, he cautioned over leaving the single market without a trade agreement in place, saying: “Let’s make sure that we go on doing trade with our biggest export market; otherwise withdrawing from the single market would be the biggest single act of protectionism in the history of United Kingdom.”

For the construction industry, the exact impact of any future trade deals is, of course, unknown but the referendum vote itself has already affected the sector.

Shares in construction companies were down considerably in the wake of the vote, with companies such as the now-defunct Carillion and building materials group SIG blaming their 2016 profit dips on the referendum.

Elsewhere, contractors were particularly concerned with the impact the vote would have on their already squeezed workforce, with the Royal Institution of Chartered Surveyors (RICS) predicting the sector could lose around 200,000 EU workers post-Brexit.

This June, the CEO of the Federation of Master Buildings Brian Berry said the vote had also played a part in the sharp drop in construction output for the three months from February to April 2018, where the construction sector declined 3.4 per cent, compared with the three previous months – the biggest fall since the latter stages of the recession in August 2012.

“The depreciation of sterling following the EU referendum has meant bricks and insulation in particular have become more expensive,” he says, adding that he expects this squeeze to continue.

Contractors in the Middle East

Though protectionist policies can often be about protecting trade interests, within the Middle East such measures have been put in place due to political tensions. The outcome for contractors, however, can still be problematic.

As JLT Turkey Executive Director Omer Askin explains, Turkish and Chinese contractors currently operating in Qatar may have difficulties getting business in neighbouring Saudi Arabia and the United Arab Emirates due to a ramping up of rhetoric and political hostilities since the Saudi blockade last June – a protectionist stance that he believes will continue for a while.

“In the Middle East [protectionism] is not about the economy; it’s about the politics in the region. So, if you are winning accounts in Qatar and you are a Turkish contractor, then one can see Saudi Arabia trying to find alternatives against you,” he says.

As a result he advises contractors that are active or interested in this region to find less risky alternatives to engage in new business such as nearby southern and central Africa, which has a lot of upcoming infrastructure projects.

Opportunities in China

That said, there are globalised policies coming out of regions that are more traditionally protectionist leaning, which could create opportunities for contractors in the future.

As Gowling WLG notes in its Global Protectionism report: “While on a global scale, India and China may still be considered protectionist, both the New Delhi and Beijing governments are embracing open trade through bilateral cooperation and initiatives such as China’s One Belt, One Road Initiative [now named the Belt and Road Initiative].”

The $900 billion project has the potential to be one of the world’s largest platforms for economic collaboration, it says, covering around 65 per cent of the globe’s population and one third of its GDP.

Clearly, though, in an era of political uncertainty, it will be vital for contractors to understand the short- and long-term risks attached to entering or existing within protectionist countries.

As JLT’s Askin notes, they should consider alternative regions with lower protectionist policies to lower their risk exposure.

India’s renewable energy policy

A recent example of environmental protectionist measures can be seen in India, where Prime Minister Narendra Modi has implemented a 70 per cent import duty on Chinese and Malaysian solar panels.

The hope is that the move will help to boost India’s solar panel manufacturing industry, which many believe has failed to grow in size due to China’s dominance in the market.

Despite this, however, there are concerns by some Indian developers that this could actually harm domestic players.

Sumant Sinha, CEO of one of India’s largest renewable energy independent power producers ReNew Power, told the Financial Times: “This is being done to protect only a few Indian manufacturers, but it will increase the cost of all solar installations. This could put the industry in major uncertainty in terms of adding new capacity.”

Smaller manufacturers in the country have also raised concerns about how the tariff could impact their business.

For more information please contact Omer Askin, JLT Turkey Executive Director on omer.askin@jltgroup.com.