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The new global challenge: Stemming the tide of rising protectionism

Published: Sunday, Apr 19, 2009

The_Financial_Express
 

The new global challenge: Stemming the tide of rising protectionism

Zaidi Sattar
April 19, 2009

An unfortunate fallout of the global economic crisis is a creeping rise in protectionism. Many of the economic stimulus packages contain provisions that encourage spending on local products in preference to imports. When times are bad, economic nationalism – protectionism in another garb -- has a tendency to raise its head. It happened in the 1930s. It might happen again, unless something is done to prevent such tendencies.

Besides giving birth to Keynesian economics -- which propagates expansion of public spending to compensate for deficient aggregate demand in economic slowdown -- the Depression of 1930s taught us more than a few lessons in economic policy. One was that raising trade barriers in times of global recession can only make matters worse. The Smoot-Hawley Tariff Act passed by US Congress in 1930 proved to be the last nail in the coffin of the pre-war global economy. It spurred beggar-thy-neighbor tariff increases – trade war – across countries, shrinking trade, and prolonging the Depression. The General Agreement for Tariffs and Trade (GATT) signed in 1947, a precursor to World Trade Organisation (WTO), was meant to prevent a repeat of such self-defeating policies. It worked, for the better part of sixty years following the World War II. 

As we now know, the world has once again fallen on hard times. The global economy is experiencing a synchronized decline in output and trade (Table 1), as projected by the leading multilateral agencies in their latest updates.

Table 1. Global GDP and Trade Growth Projections

GDP growth

2008

2009

2010

IMF

3.4

0.5

3.0

World Bank

1.9

-1.7

2.3

OECD

2.2

-2.7

1.2

Trade growth

     

WTO

2.0

-9.0

 

IMF

4.1

-2.8

3.2

World Bank

5.8

-6.1

3.8

OECD

2.5

-13.2

1.5

Source: IMF, World Bank, OECD, WTO

With world output shrinking for the first time since 1982, WTO projects trade volume to decline by 9.0% in 2009. While the transmission mechanism for this fallout has been from diminished demand to shrinking trade, basic principles of international economics indicate that this is just the wrong time to raise trade barriers in order to shore up domestic industries in distress. That will only make things worse, prolong the current recession, and keep the global recovery at bay.

Yet, that seems to be the disturbing trend as there is growing evidence of countries, both developed and developing, adopting trade measures that smack of protectionism either directly, or in some ‘murky’ form. Despite the statements by Group of Twenty (G20) leaders at the Washington summit last November that they will hold off any protectionist measures at least until end of 2010, that pledge was upheld more in its breach, as the World Bank collated evidence that 17 of the G20 countries had initiated some form of protectionist measures (Table 2). As if that is any consolation, there is some difference in the approach adopted by developed and developing countries. Developed countries have opted for subsidies and support packages (e.g. to carmakers and farmers), while developing and emerging market economies resorted to protection of all mixes and forms: subsidies, tariffs, quantitative restrictions (QRs), special restrictions like non-automatic licensing requirements, more stringent application of WTO-compliant standards or sanitary and phytosanitary (SPS) requirements, etc.

Table: II Rising Protectionism since November08 in Developed and Developing Countries

 

PROTECTIONIST MEASURES

Developed countries (Products)

Developing countries (Products)

 

1. Tariff increases

Korea (crude oil), Russian Federation (Used cars, trucks, buses, particular types of flat metals, milk and dairy cream)

China (apatite and silicon, Iron and steel products), Ecuador (Tariff increases on 630 tariff lines), Indonesia (petrochemical, steel, and electronic parts), India (tariff increases on soybean oil and steel),Turkey (iron-steel – hot rolled flat products; iron-steel cold rolled flat products).

 

2. Non-tariff barriers

     

2.a QR (ban)

Russian Federation ( Pork)

China (Irish pork, soybean oil-cake, pork, and neem oil), India (Baby toys), Indonesia (film).

 

2.b Other Restrictions

USA (Buy American provisions in stimulus package: American Recovery and Reinvestment Act of 2009).

Argentina ( textiles, TV, toys, shoes, and leather goods: Introduction of non-automatic import licensing requirements; auto parts: Introduction of reference price covering around 1,000 imported products), India (steel products and auto parts: Introduction of licensing requirements for imports; 17 steel imported product: New mandatory product quality certification from the Bureau of Indian Standards (BIS) for imports ), Indonesia (foreign goods -- including garments, footwear, toys, electronics: only permitted in five ports and airports; food and beverages, toys, electronics, footwear, and garments: New licensing, reporting, and pre-shipment inspection requirements for imports).

 

3. Subsidies and Support packages

Germany (carmakers), France (carmakers), Australia, Canada, France, EU, Germany, Italy, Japan (Manufacturing subsidies), Portugal (Support credit guarantee and direct subsidy to component suppliers) United states (automakers & dairy products), EU (dairy products)

China (Support credit guarantee to SME), Brazil,Argentina, S. Korea (support credit guarantee and subsidy to carmakers, component suppliers).

 

Source: PRI staff compilations based on WTO Trade Policy Review Briefs and respective country newspapers.

 
 

Moreover, since July 2008, WTO has recorded a sharp rise in both initiation of anti-dumping investigations (up 32%) as well as implementation of penal actions (up 20%). Coming as they do at a time when domestic industries have been bruised by falling external demand, these measures have a clear hint of contingent protection.

In the backdrop of rising protectionism globally, the April G20 summit communiqué appeared more forthright on the subject of trade protectionism as there was a much clearer commitment – if it could be called that. If the communiqué is to be believed, the summiteers this time around showed some grit by agreeing to enhance WTO’s monitoring and surveillance process through its Trade Policy Review mechanism. Britain’s Gordon Brown came out swinging by proposing to “name and shame” perpetrators.

But the proof of the pudding is in the eating, and we need to wait and see how many of the countries do actually heed those calls. If they do, economic recovery will be sooner. If they don’t, rising protectionism could become the ‘black hole’ that gobbles the trillions spent on economic stimulus packages.

As in other aspects of the current crisis, Bangladesh has stood its ground well, though clamours are getting stronger for subsidies and support packages. No additional protectionist measures (subsidies, tariffs or non-tariff measures) have been initiated since the unraveling of the crisis. Two developments have come together. World Bank’s Commodity Market Review records global non-fuel commodity prices declining 38% between July and December 2008, thus undercutting existing tariff protection to domestic industries. But this effect is counterbalanced by the substantial price declines of industrial raw materials, intermediate goods, and capital goods, across the board. Consequently, the net effect on protection is muted, if not neutral. 

The last thing Bangladesh should be doing is going for a tit-for-tat action on protection which would be tantamount to shooting itself in the foot. Any support policies should be based on proper economic rationale, keeping in mind the heightened monitoring and surveillance activity of WTO’s Trade Policy Review Body and what could be justified as Special and Differential treatment in the context of  the current global slowdown. Too much of Bangladesh’s fortune is riding on a quick recovery of global trade volumes.

 

(Dr. Sattar is Chairman, Policy Research Institute of Bangladesh. Tamzidul Islam of PRI provided research assistance. He may be reached at e-mail: zsattar@pri-bd.org)

 

Last Updated on Thursday, 06 January 2011 05:33

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