Running Out of Tools: The G20 and the Global Trade Halt
Restoring economic growth is the primary mission of the G-20. International commerce — exports, imports, foreign direct investment (FDI), international licensing, technology transfer, and cross-border movement of expertise — can boost national economies, improving performance in the short and longer run. For this reason, at the beginning of the global financial crisis G-20 Leaders sensibly committed to keep the world economy as open as possible. One tangible manifestation of that commitment was the pledge to refrain from protectionism.
The Global Trade Halt
Trade and FDI bounced back after the nadir of 2009. However, their recoveries have run out of steam (see Figure 1 for the data on world export volumes). It has been fashionable among certain international organisations and analysts to talk of a global trade slowdown. This is wrong — world export volumes have been flat for two years now. If the United Nations data on the total value of world trade is to be believed, global trade hasn’t grown in five years. What we are experiencing is a Global Trade Halt, which calls into question the assumption that globalisation is a process that automatically expands over time.
Figure 1: World export volumes have stagnated for two years
Source: CPB Netherlands Bureau for Economic Policy Analysis World Trade Monitor (February 2016).
The CPB’s data on export volumes for 2015 paint a grim picture. Export volumes actually fell in Emerging Asia, Japan, and the United States. Similarly, as far as FDI flows are concerned, the May 2016 edition of UNCTAD’s Global Investment Trend Monitor concluded “Barring another wave of M&A deals and corporate reconfigurations, FDI flows are expected to decline in 2016.” In sum, external factors are contributing little to growth.
Failure to identify root causes
While the “global trade slowdown” has attracted the attention of several analysts, unfortunately, they have failed to identify its root causes. Instead, only proximate causes — slowing parts-and-components trade, retrenchment of supply chains, and falling shipments of capital goods — have been identified. What decision-makers really need to know are the policy steps that have influenced these private sector decisions.
Here, the news may be mixed. For example, the March 2016 accord between G-20 Finance Ministers to limit currency fluctuations is likely to have diminished one form of uncertainty that is well known to reduce trade. Looking forward, what matters is whether this accord will last. There are, however, less positive possibilities. Could the retrenchment in supply chains have anything to do with the growing resort to local sourcing rules on foreign investors and associated with government purchases or with the decision by some G-20 members to revoke bilateral investment treaties? On this crucial matter, the international organisations and many analysts have not served G-20 policymakers and officials well.
Less faith in macro stimulus results in diminished policy options
All of this matters because policymakers are running out of tools to restore economic growth. For many, expansive fiscal policy is off the table. Aggressive monetary policies are said to be reaching the limits of their effectiveness. That leaves structural reform (which few policymakers seem keen on embracing) as well as its opposite — domestic re-regulation and protectionism — and currency manipulation. In an era of zero global trade growth, national export expansion comes at the expense of other nations and the temptation to engage in beggar-thy-neighbour activity grows. Arguably, the world economy is at a crossroads as far as growth responses are concerned.
A depleted toolbox for policymakers confronts a world economy where many important sectors face excess capacity. The consequences of too much supply chasing limited demand is all too clear in the steel sector — sharp trade tensions and resort to import restrictions have made headlines this year and last. But excess capacity can be found in other sensitive sectors too, such as the chemical sector and automobiles. In these circumstances, the temptation to shift the burden of adjustment on to trading partners is all the greater.
New forms of competition, often associated with the rise of the digital economy, are shaking up sectors unused to foreign rivals. The backlash that companies such as Uber and Airbnb are facing, as well as the investigations into the potential abuse of monopoly power by Internet behemoths, increasingly has a nationalistic edge to it. The departure from the liberal attitudes towards cross-border commerce witnessed in the years after the fall of the Berlin Wall becomes clearer over time.
Succumbing to the protectionist temptation
In this climate it should come as no surprise that governments have been resorting to measures that tilt the commercial playing field in favour of domestic enterprises at an increasing rate. The Global Trade Alert (GTA) team, which I coordinate, keeps an eye on government steps to open and close domestic markets to international competition and tracks many more policy interventions than the international organisations. Even more importantly, the GTA keeps looking for evidence of government action from earlier months and years and updates its statistics accordingly, so its totals tend to be much higher than those found in the reports of international organisations.
As a result of reporting lags, there is some tendency for the GTA to find that resort to protectionism tends to be higher in earlier years (such as 2009). This might give the incorrect impression that protectionism in more recent years is less of a problem. To sidestep this problem, in Figure 2 data are reported on the total numbers of government measures that benefit and harm foreign commercial interests implemented in a given year but reported by 15 April of the following year.
Three findings stand out. First that, in each year, the number of harmful (discriminatory) measures always exceeds the number of liberalising measures implemented. Second, that there has been a doubling of the number of harmful measures implemented from 2012 to 2015, coinciding with the global economic growth slowdown. Third, that the gap between the liberalising and harmful measure totals is widening over time. While much has been made in 2016 about populist backlash against free trade and the potential threat of a return of protectionism — especially in certain G-20 nations — in fact, governments worldwide have been making life more difficult for foreign firms and investors for some time.
Figure 2: Since global growth slowed in 2011-12, protectionism has gotten much worse
Totals found by 15 April of the following year—which helps correct for reporting lags
Source: Global Trade Alert (May 2016).
Worse, the number of beggar-thy-neighbour steps implemented by governments between 1 January and 15 April 2016 has broken the records for previous years (see Figure 3). For sure, the number of liberalising measures is up a lot too, but again the former far exceeds the latter. The governments of the G-20 nations are responsible for 125 of the 149 trade distortions implemented so far this year. Of the 125 trade distortions imposed by the G-20, 40 were subsidies to firms facing international rivals and 41 were tariffs imposed on dumped or subsidised imports or on import surges.
Having lost faith in macro stimulus policies, perhaps many G-20 governments are already turning to policies that distort markets rather than boost growth? These data are a major source of concern and, while it may be tempting to look for fresh topics to discuss, there is still plenty that the G-20 can do with its long-standing agenda on protectionism.
Figure 3: Initial reporting for 2016 suggests even worse news on protectionism
Source: Global Trade Alert (May 2016).
Use the Global Trade Halt to revive the G-20’s interest in trade
The redistributive nature of much trade policy plus the natural diplomatic desire to avoid confrontation no doubt account for the limited attention that G-20 policymakers give to protectionism. Now that global trade is contributing little, if anything, to growth, that governments are finding it harder to resist the temptation to steal global market share for their firms. This temptation is all the greater at a time when monetary and fiscal policy tools have lost their shine. Further action should be taken to revive the G-20’s collective interest in an open, transparent world trading system.
The G-20 pledge on protectionism should not just be reaffirmed, but active steps must be taken to unwind the backlog of trade distortions implemented in the crisis years. Moreover, the international organisations should examine, with inputs from others, how existing international trade rules could be strengthened to reduce the resort to beggar-thy-neighbour activity. The impact of these trade distortions on international trading costs should be estimated. Furthermore, the merits of eliminating nuisance tariffs (tariffs less than 3%) should be examined by experts, international organisations, and governments in advance of the 2017 G-20 Leaders Summit.
Simon Evenett is Professor of Economics at University of St. Gallen and CEPR. This paper was presented at an ICTSD workshop on “Key policy options for the G20 to support robust international trade and investment”, back to back with the G20 Trade and Investment Working Group Meeting in Nanjing, April 2016.
This article was first created under the ICTSD project, “China’s leadership role in the WTO and G20: 2015, 2016 and beyond.”