Bridges Weekly Trade News Digest • Volume 13 • Number 3 • 28th January 2009

WTO Report Finds ‘Limited Evidence’ of Protectionism amidst Economic Crisis

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WTO Members have not resorted to full-fledged protectionism amidst the ongoing global economic turmoil, a report from the office of WTO Director-General Pascal Lamy concluded earlier this week. But as the crisis continues, countries could still raise new trade barriers to protect domestic industries even while respecting their WTO commitments, Lamy warned in the 14-page report that was distributed to WTO Members.

Despite widespread fears to the contrary in recent months, Lamy’s report says that “there has been only limited evidence so far of increases in tariffs or non-tariff barriers, or increased resort to trade remedy actions.”

Many analysts had feared that governments struggling to shield domestic producers from the brunt of the economic crisis might try to close their borders to competing imports. But economists warn that such policies ultimately stifle trade and serve to exacerbate and prolong economic crises. Indeed, many blame the rapid spread of protectionism in the 1930s for transforming what began as a recession into the deepest economic depression of the 20th century.

“In today’s very interdependent world the go-it-alone solution does not work,” Lamy said in an interview this week with the UK’s Channel 4 News. “You have to work on this collectively, you have to consult with others and you have to abide by the rules of the international system.”

To that end, the Director-General continues to push for the conclusion of the seven-year-old Doha Round of trade talks at the WTO, which he says is necessary to ensure that the international flow of goods and services does not grind to a halt as the global economy slows. Stronger multilateral disciplines could “reduce the scope for increased trade restriction,” and provide a bulwark against protectionism amidst growing economic troubles worldwide Lamy wrote in the report.

“We all know that when the world decides to turn itself towards protectionism, the most vulnerable will suffer the most,” Lamy said in a speech in London last week. “It is therefore safe to conclude that the WTO insurance policy is even more indispensible for the poor at this juncture.”

‘Nothing Dramatic’ in Members’ New Trade Policies

Although, as Lamy admitted to Channel 4, “nothing dramatic” has happened in terms of an increase in protectionism since the start of the crisis in the fall, the report he issued earlier this week describes several policies that WTO Members have recently enacted that restrict or distort trade.

“The most significant action taken, mostly in developed countries, has been increased state aid to particular industries, notably the automobile industry,” the report said, noting that Argentina, Australia, Canada, China, France, Germany, Russia, Sweden and the US have all introduced packages to support domestic automakers. Specific provisions include consumer incentives, higher duties on car imports, as well as loans and tax cuts or exemptions for automakers and dealers.

Although Lamy acknowledged in the report that it remains to be seen how such measures will affect international trade, the Director-General told Channel 4 that there can be no doubt but that rich-country bailout packages – in the auto sector and otherwise – discriminate against developing countries that cannot afford to provide domestic producers that level of support.

“Let’s not make a system we have been trying in recent years to make more development friendly, let’s not make it development adverse,” Lamy said in the interview.

The report also noted specific instances in which countries have raised tariffs in recent months.
Ecuador recently raised tariffs on some 940 products, but insisted that the duties are consistent with its WTO commitments. The higher tariffs are projected to provide Quito with an additional US$ 85.5 million in revenue, the government said.
India restricted imports and increased duties on some steel products in November, the report said, while Indonesia has restricted the number of ports and airports that can accept international imports.

Meanwhile, the EU recently announced plans to reinstate export subsidies on some dairy products, a move that has drawn harsh criticism from the Cairns group of farm-exporting countries (see related story, this issue).

Trade observers warn, however, that protectionism should not simply be equated with higher tariffs; it can also manifest itself in an increased number of retaliatory actions at the WTO.

But so far, the DG’s report concluded that in fact “there has been no dramatic increase in the number of anti-dumping investigations initiated in the past few months,” although the report noted that some observers expect the number of such inquiries to rise in 2009. Members instigate anti-dumping probes when they believe a trading partner to be selling their exports at artificially low prices, a practice known as ‘dumping’ in WTO parlance.

More seriously, however, Lamy warned in the report that the continued short supply of trade financing – effectively the grease in the wheels of global commerce – could be devastating for trade, especially in countries that already struggle to qualify for the loans they need to ship their goods (see Bridges Weekly, 19 November 2008, http://ictsd.net/i/news/bridgesweekly/33962/).

“The cost of trade credit has been tripling in some emerging economies, with scarcity of supply gaining ground in the developing world,” Lamy wrote in the report. The gap between supply and demand reached roughly US$ 25 billion in November, according to private sector sources, the report said.

But significant steps have already been taken to begin addressing the shortfall in financing. Brazil’s Central Bank reacted quickly by providing US$ 1.62 billion in new trade loans in October, all major export credit agencies have increased short-term credit guarantees, and the US and China announced in December that they would jointly provide US$ 20 billion to finance trade (see Bridges Weekly, 10 December 2008, http://ictsd.net/i/news/bridgesweekly/35964/).
But even these actions may not be enough.

“Despite these efforts, it is unclear whether private sector financing will be able to meet demand, particularly in developing countries, in a situation of rapid deterioration of risk perception,” the report said.

‘A Work in Progress’

Although the report is billed as ‘purely factual’, Lamy himself acknowledged in the introduction that the quality and comprehensiveness of the data that it contains should not be taken for granted.
“The information on changes in trade policies and trade-related policies contained in this report has been collected by the Secretariat from a variety of public and official sources,” he wrote. “In some cases it has been possible to verify the information through formal channels, but in most cases it has not.”

Thus, Lamy is calling the report a ‘work in progress’ and has promised to follow up in coming months.

ICTSD reporting; “’Beware protectionism’, says WTO head,” CHANNEL 4 NEWS, 27 January 2009.