WTO Warns of ‘Significant Slippage’ toward Protectionism

1 April 2009

Global commerce is in danger of “an incremental build-up of restrictions that could slowly strangle international trade” and undermine worldwide attempts to boost demand and restore growth, the WTO director-general warned last week.
 
There has been “significant slippage” in WTO Members’ success at resisting protectionist pressures since the start of this year, according to a 26 March report on trade-related measures taken in response to the economic crisis that was released by WTO chief Pascal Lamy’s office. Governments have increased tariffs, introduced new non-tariff measures, and sought to use trade remedies such as anti-dumping duties on imported goods.
 
Nevertheless, the investigation found “no indication of an imminent descent into high intensity protectionism, involving widespread resort to trade restriction and retaliation.”
 
The first such report, released in January, found “only limited evidence” of moves to increase trade protection since last September, when the global economic crisis dramatically deepened (see BRIDGES Weekly, 28 January 2009, http://www.ictsd.org/bridges-news/bridges/issue-archive/wto-report-finds-limited-evidence-of-protectionism-amidst-economic).
 
But the economic prognosis has only worsened since then, with each new forecast gloomier than the last. Global economic output is set to shrink this year for the first time since the Second World War. The World Bank reckons that global GDP will contract by 1.7 percent in 2009; the Organization for Economic Cooperation and Development puts the figure at 2.75 percent (see related story, this issue).
 
The WTO predicts that world merchandise trade will shrink by 9 percent this year; the OECD estimates a 13.2 percent “collapse.” This marks a sharp reverse in a decades-long pattern that saw trade volumes outstrip GDP growth, as the development of international production chains meant that many components in a single product crossed borders and thus were counted towards trade figures.
 
Both the WTO and the OECD put most of the blame for the trade contraction on reduced global demand and shortages of global finance, not on protectionist barriers. Falling commodity prices and a rising US dollar have helped push down the dollar value of trade.
 
“The main risk,” according to Lamy’s report for WTO Members, “is that governments will continue to cede ground to protectionist pressures, even if only gradually, as long as the global economic situation continues to deteriorate.” Past downturns had been marked by similar measures, and supposedly temporary subsidies and protective measures to protect jobs and businesses in fact took years to unwind, during which they underwrote uncompetitive industries and sectoral overcapacity.
 
In a rebuke to ‘buy national’ requirements in governments’ fiscal stimulus packages, the report urged countries to “reflect on the contradiction” of using trade restrictions that effectively tax production as part of policies aimed at boosting aggregate demand. Coordinating the size and timing of stimulus packages, rather than seeking to prevent spending from ‘leaking out’, would do more to boost aggregate demand globally, it said. Leakage into higher imports would be at least partially offset by increased exports.
 
Subsidies, the report argued, would be best targeted at consumption, not production, with consumers free to opt for imported goods or services.
 
The report, which WTO secretariat officials hope will be discussed by Members in mid-April following its translation into French and Spanish, contained numerous plugs for the troubled Doha Round of trade negotiations. A Doha accord would be an “unambiguous” rejection of protectionism and stimulus package worth at least US$ 150 billion for the global economy, it said. It also emphasised that the crisis was highlighting the extent to which existing WTO constraints allowed Members leeway to restrict trade or increase distorting subsidies.
 
Trade measures, fiscal stimulus, financial bailouts examined
 
In three annexes, the report contains detailed lists of trade and trade-related measures, stimulus packages, and financial sector bailout policies introduced by different WTO Members.
 
The WTO secretariat compiled the list on the basis of government documents, information directly provided by delegations, news reports, and publicly available sources. The report is informal and confidential to Members, and has no legal standing. Notably, many governments kept pledges made after the last report to inform the WTO of changes in their trade policies, even when raising import barriers (although these were not binding, unlike the often-tardy subsidy notifications). Some governments ‘counter-notified’ restrictive policies by their trading partners, sources report.
 
The trade measures range from Argentine import licensing requirements on car tyres to the EU’s introduction of anti-dumping duties on Chinese and Moldovan steel. Other examples include India’s introduction of a 20 percent duty on imported soybean oils, Mexico’s withdrawal of NAFTA trade concessions for certain US imports, and the ‘Buy American’ rules in Washington’s fiscal stimulus package.
 
Not all the measures mentioned served to restrict flows of trade and investment. A minority of the new measures aimed to facilitate commerce. For instance, several countries eliminated import duties or export taxes on some products, or moved to cut trade-related red tape or ease access to trade finance.
 
However, the report found that “a pattern is beginning to emerge of increases in import licensing, import tariffs and surcharges and trade remedies to support industries that have faced difficulties early on in this crisis.” Anti-dumping investigations are trending upwards, and “could accelerate rapidly.”
 
Subsidies to the steel and automotive industries were singled out for comment, as were financial sector bailouts. The report recognised that most developing countries can simply not afford to provide such vast sums in industrial aid. It warned that the support measures could prolong the operations of uncompetitive firms, denying market share to more efficient producers, including those overseas.
 
While it recognised the paramount importance of preventing the systemic failure of global financial markets, it noted that bailouts to financial institutions could have trade effects, keeping insolvent or uncompetitive financial institutions alive at the expense of foreign competitors. Government backing of financial institutions, the report cautioned, might also come with formal or informal direction to provide favourable terms to national businesses and exporters.
 
Multiple challenges to developing countries
 
Developing countries are being hit not only by declining growth and demand for their exports, but also by the sudden jump in the cost of trade finance, a drop in remittances, reduced foreign direct investment, and outflows of portfolio investment.
 
The report detailed efforts by international financial institutions, government-backed export credit agencies, and some central banks to support trade finance, by providing guarantees and liquidity to importers. Traditionally, trade finance – the short-term credit or insurance that enables exporters to offset the risk that they will not be paid and importers to offset the risk that they will not receive merchandise they paid for – was considered almost risk free, with the traded goods serving as collateral. But with banks suddenly unwilling to loan to exporters or importers at only a tiny premium above benchmark rates, governments had to intervene to keep trade flowing.
 
Many developing countries are likely to face “a sharp deterioration” in their balance of payments in the second half of 2009, the report said, citing a World Bank estimate that developing countries face a financing shortfall of US$ 270 to US$ 700 billion, while their export earnings are projected to drop.
 
The Group of 20 leading industrialised and developing nations are expected to discuss developing countries’ need for finance and aid during their ongoing summit in London (see related story, this issue).
 
In February, many countries expressed support for Lamy’s first report, and said they wanted to see continued monitoring of new instances of trade-restricting policies (see BRIDGES Weekly, 12 February 2009, http://www.ictsd.org/bridges-news/bridges/news/wto-warns-against-protectionism-promises-increased-monitoring).  Bolivia observed at the time that WTO rules called only for the director-general to make a single annual review of the global trading environment. Whether the exercise continues will presumably be determined by Members’ mid-April response to the new report.
 

ICTSD reporting.

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