What now all pretence has gone? The G20 and protectionism after Baden-Baden

7 April 2017

The message from Baden-Baden was clear: maintaining open borders has been demoted as a G20 policy priority. With mounting risk of copy-cat protectionism, current trade policy dynamics suggest this is a particularly inauspicious moment to let down the G20’s guard on protectionism. Should G20 Leaders abandon their pledge on protectionism at the Hamburg summit then the world trading system will enter a new, more troubling phase at a time when global trade flows have plateaued and foreign direct investment is in retreat.

At the conclusion of their March 2017 meeting in Baden-Baden, G20 Finance Ministers and Central Bankers issued a communiqué that included the following statement on trade: We are working to strengthen the contribution of trade to our economies.” Even by the standards of international diplomacy, this sentence shows a distinct poverty of imagination. Worse, at the insistence of American officials the communiqué dropped any reference to resisting protectionism.

If the high priests of orthodoxy — for in most nations that is what finance ministries and central banks represent — cannot bring themselves to condemn protectionism, then all pretence of restraint has gone. For sure, many of us have been sceptical about G20 promises to maintain open borders but, as The Economist recently noted in this context, “hypocrisy is the tribute vice pays to virtue.” The message from Baden-Baden was clear: maintaining open borders has been demoted as a G20 policy priority.

What next?

In the light of Chancellor Merkel’s recent trip to the White House, little positive can be expected from engaging with the most senior levels of the US government on protectionism. In this regard, it seems Italian attempts to encourage G7 members to take a firm line on protectionism at their summit in Sicily in May 2017 will almost certainly come to nothing. We should not be surprised, then, if Mrs. Merkel concludes that it is not worth risking a showdown over protectionism at the G20 Leaders Summit in Hamburg. Consequently, the most likely outcome is that the language on protectionism in the Hamburg summit declaration will be watered down significantly or dropped entirely.

So what?

If the G20 Leaders’ statements about eschewing protectionism had the force that supporters of this form of non-binding international economic governance believe, then surely after Baden-Baden they should be worried? After all, the logic of their argument suggests that abandoning pledges of protectionism now should weaken governmental restraint and result in more trade distortions being imposed in the future. Yet curiously, at least on my reading, the analysts and academic proponents of the G20 process have not been issuing warnings about protectionism since the Baden-Baden meeting.

Don’t count on the WTO to hold the line against protectionism

Ah, but won’t the WTO hold the line, even if G20 promises fall to one side? The key problem with relying on the WTO to restrain protectionism is that its current rule book allows so much leeway to governments that, realistically speaking, it is difficult to understand how it could restrain protectionism.

For comparison’s sake take the infamous Smoot Hawley Tariff of 1930 that resulted in the average tariff rate paid on imports into the United States rising from 13.48 percent in 1929 to 19.80 percent in 1933. It may surprise many readers to know that eight of the G20 members — Argentina, Australia, Brazil, India, Indonesia, Mexico, South Africa and Turkey — could today hike their average tariff rates by more than the Smoot Hawley increase without breaking their WTO obligations. Mexico, the target of so much ire during the 2016 US Presidential election, could raise its import tariffs across the board by 29.1 percent without falling foul of WTO rules. It would be unwise for Mexico to do so, but there is nothing in Mexico’s WTO obligations that prevents such a tariff hike.

What too many analysts and government officials have overlooked is that, while many industrialised countries, China, and Russia, have little leeway to raise their tariffs under WTO rules, this is not true for all of the G20. Had the focus here been on leeway in agricultural subsidies rather than tariffs, the story would have been reversed — here the industrialised countries have plenty of room to engage in a subsidy war without worrying about breaking WTO rules.

The best that can be said for the WTO is that it channels protectionist pressure towards policy instruments less constrained by international rules. It is not for nothing that so much has been written about the rise of murky protectionism since the onset of the global economic crisis. Governments have become very creative in finding new subsidy, public procurement, localisation, and export promotion schemes that tilt the playing field towards domestic firms in national and world markets.

The appendices of the Global Trade Alert’s reports show how much trade is affected by these trade distortions. In the case of this year’s G20 host, a detailed product-by-product and market-by-market analysis revealed that, by the end of 2015, when competing in foreign markets 90.07 percent of German exports faced one or more trade distortions imposed since the G20 Leaders first promised not to engage in protectionism in November 2008. Germany’s experience is far from unusual in this respect.

The last line of defence for those straining to defend the WTO is its Dispute Settlement Understanding. The deficiencies of this much oversold system of dispute settlement have been laid bare in recent years, not least by members of the WTO Appellate Body. Given the frequency with which trade distortions have been introduced since the crisis began, few cases are ever bought to the WTO — those who live in glass houses should not throw stones. The small number of cases brought now appears to have overwhelmed the system, creating significant delays (which Korea has openly complained about). Lastly, even when judgements are rendered, during the crisis governments have taken steps to circumvent them.

There are so many holes in WTO rules that the pertinent question is how it could ever prevent a determined government from tilting the playing field — not whether the WTO has limited protectionism by its member governments in recent years. We need a system that works in practice, not just in theory.

But isn’t world trade growing again?

Some recent press reports have noted that — according to the latest data on world trade volumes — global trade is growing again. In an article on its front page on 31 March 2017, the Financial Times came up with this impressive statistic: “Global trade volumes grew at their fastest pace since 2010 in the three months to January.” One can imagine the following reaction to this news: If world trade is growing so fast, then surely protectionism isn’t a problem and we can set this awkward matter aside for the G20?

Figure 1: Job done? But for an unusual jump in November 2016, world trade volumes would still be stuck.

 

Source: CPB World Trade Monitor

The data source used by the Financial Times is well reputed, that is not the point of contention. What is at issue is the extent to which global trade growth has been bolstered by a single month’s data. Figure 1 sheds light on this matter. Indexing world export volumes to 100 at their peak, the chart shows the jump in trade in the fourth quarter of 2016. But for that jump world export volumes, which had reached a plateau in January 2015, would still be treading water.

Figure 1 also reports the month-on-month changes in world export volumes since January 2005. The jump in export volumes in November 2016 is the largest recorded increase in over a decade. A much smaller increase was observed in December 2016 and a fall observed in January 2017. The November 2016 increase accounted for 89.5 percent of the total increase in world export volumes during the past three months, which is the period the Financial Times chose to highlight. In short, the last three months’ data on world export volumes do not point to a sustained turnaround in global trade growth. 

Figure 2: With the exception of the sluggish Euro Zone, export volumes of the world’s major trading regions are stuck in established ranges.

 

Source: CPB World Trade Monitor

When data on the export volumes of the leading trading nations and regions are examined — which ought to be of concern to the G20 nations — the pattern is far from settling. Figure 2 reports the export volumes of the United States, the Eurozone, Japan, and “Emerging Asia,” (a grouping of countries created by the World Trade Monitor) where an index has been created for each exporter which takes the value of 100 at the maximum value observed since January 2005. Doing so allows us to compare whether recent export volume data are close to their peak.

The main message from Figure 2 is that, of the large exporters considered here, only the sluggish Eurozone has seen consistent growth in export volumes since 2010. Even with recent growth, Japan’s export volumes are well below their peak. By early 2017 US export volumes appear to recovered to levels last seen in 2014. Even “Emerging Asia”, which is credited by the Financial Times and others as being behind the recent growth in world trade, has yet to recover to the peak witnessed in early 2015. All in all, it would seem premature to put the champagne on ice. The plateau in global trade may well be over but no one in their right mind would want to go to the wall defending that proposition with the currently available data.

Populism and the threat of copy-cat protectionism

The challenge to world trade from contemporary protectionism is not just that the leader of a major trading nation evidently embraces economic nationalism. It is that such a reaction has occurred after a sustained bout of beggar-thy-neighbour activity by G20 members which, in turn, could provide the pretext for a government inclined towards protectionism to retaliate against the alleged sins of others. The recent signing of a US Executive Order that requires documentation and study of the effects of foreign trading practices may yield enough evidence for some to act. There is a real risk of copy-cat protectionism in the months and years ahead.

This is not a hypothetical. There are depressing crisis-era precedents to point to. Perhaps one of the most high-profile examples came early in the crisis when governments decided to implement fiscal stimulus packages to stabilise their economies. On the face of it, such packages are fine. However, when combined with requirements that state funds only be used to buy locally produced goods then problems arise from the point of view of international trade policy, as market opportunities are denied to foreign firms.

In February 2009 the US Congress passed such a stimulus package with so-called “Buy America” provisions. As Map 1 below shows, within one year a large number of the US’ trading partners, including many G20 members, had included similar local purchasing requirements in their budget legislation. Copy-catting “Buy America” provisions continued through to 2016, as the map indicates. A world trading system without a proper system of restraint is particularly vulnerable to copy-cat protectionism. 

Map 1: A wave of discriminatory public procurement policies followed US enactment of new “Buy America” provisions in 2009.

 

Source: Global Trade Alert

Concluding remarks

Pretence can serve a useful role in international economic diplomacy — to set a benchmark for good behaviour by sovereign states that face few other effective external sources of restraint. When it is gone, however, there is less to obscure reality and copy-catting bad practice becomes all the more tempting.

Current trade policy dynamics suggest this is a particularly inauspicious moment to let down the G20’s guard on protectionism. Far too often national security is invoked as a reason to take action against competitive foreign rivals. Moreover, terms associated with the trade frictions of the 1980s and 1990s — namely, unfair trade and trade deficits — are being revived by some as a pretext for unilateral action. Threats to renegotiate trade deals, and difficulties in ratifying regional trade agreements, have cast shadows over key bilateral trading relationships. With the risks associated with cross-border commerce growing, no one should be surprised if more companies shorten the distance between their customers and production facilities, in the process forgoing cost efficiencies and with it a key benefit of globalisation.

Should G20 Leaders abandon their pledge on protectionism at the Hamburg summit then the world trading system will enter a new, more troubling phase at a time when global trade flows have plateaued and foreign direct investment is in retreat. There doesn’t have to be another Smoot Hawley-like episode for beggar-thy-neighbour policy to seriously distort global commerce — termites live underground as well.

 

This article is adapted from the ICTSD G20 Hamburg Summit 2017 book project.

Simon J. Evenett is Professor of International Trade and Economic Development, University of St. Gallen, Switzerland; Coordinator, Global Trade Alert; and Research Fellow, the Centre for Economic Policy Research (CEPR), London.

 

TAG: 
G20, WTO