Bridges Weekly Trade News Digest • Volume 13 • Number 31 • 16th September 2009
Trade Still Alive, but Competition at Risk: WTO, OECD, UNCTAD
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Despite some ‘slippage’, the world’s leading economies have largely stuck to pledges to refrain from creating new obstacles to trade and investment amidst the worst financial crisis in decades, the heads of the WTO, the OECD, and UNCTAD said this week.
But “growing unemployment due to the crisis will continue to fuel protectionist pressures for the years to come,” they warned, even though there are signs that the sharp drop in global trade and investment flows may be bottoming out.
WTO Director-General Pascal Lamy, Organization for Economic Cooperation and Development Secretary-General Angel Gurria, and Supachai Panitchpakdi, the secretary-general of the UN Conference on Trade and Development, also called on governments to “start planning a coordinated exit strategy” from their emergency support for industry and the financial sector as soon as possible, since the measures could end up favouring domestic goods and services over imports.
The joint report, issued on 14 September ahead of the upcoming Pittsburgh summit of the Group of Twenty industrialised and developing countries, tracked G20 members’ trade and investment policies from April to August. It measured them against the yardstick of the group’s promises, made over the past year, to refrain from protectionism and to minimise the negative impacts of fiscal and financial policy on trade and investment. At an April leaders’ summit in London, the G20, which has supplanted the rich country club of the G8 as informal coordinator of the global economy, had asked the WTO to monitor its members’ adherence to their pledges on trade.
“There is no indication of a descent into high-intensity protectionism as a reaction to the crisis, involving widespread resort to trade or investment restriction ore retaliation,” the report concluded, suggesting that G20 governments had managed to keep protectionist pressures within control.
It did, however, point to ‘policy slippage’, both before and since April. Some G20 members have raised tariffs and non-tariff barriers, notably to protect the steel and auto industries. Use of trade defence mechanisms like safeguards has risen. The EU and the US have brought back highly trade-distorting export subsidies to help their dairy products compete on world markets. And while fiscal stimulus measures have helped boost demand, which in turn supports trade, some countries and local and regional governments have placed ‘buy local’ requirements in their spending packages.
While the report said that trade and investment measures thus far mirrored those taken during previous downturns, “the danger is of an incremental build-up of ‘sand in the gears’ of international trade that could aggravate the contraction of world trade and investment and undermine confidence in an early and sustained recovery of global economic activity.” It noted the contradiction between attempting to boost aggregate demand and restricting trade and investment, which it described as a tax on production and income.
These conclusions were similar to those reached by Pascal Lamy’s office in three reports released this year as part of an ongoing exercise to monitor all WTO Members’ crisis-related trade policies: some backsliding but no widespread retreat into protectionism. The recent study, which differed from the WTO reports in that it focused only on the G20 and included OECD and UNCTAD data on investment, struck a markedly different tone from a World Bank alert in March, which warned that 17 members of the G20 had erected trade barriers, and raised the spectre of 1930s-style economic isolationism.
The report came out too early to reflect the Obama administration’s decision to impose extra duties on Chinese tyres, a move that prompted Beijing to threaten retaliation, sparking fears of a costly trade war (see related story, this issue).
Trade data improving
The report found cause to believe that international trade flows are “beginning to normalise.” World merchandise trade rose by 2.5 percent in June 2009, with all regions but Africa and the Middle East showing higher exports than the month before. Despite the rise, world trade in June 2009 was 19 percent below its April 2008 peak.
The trade rebound was particularly pronounced in the newly industrialised economies of East Asia, with some evidence that China’s stimulus package is boosting intra-regional trade.
Governments have successfully mobilised extra credit and insurance to counteract the sudden shortfall in trade finance after credit markets seized up last fall - a shortfall which, along with declining demand, contributed to the dramatic decline in trade flows. However, strong demand for extra credit facilities by government agencies suggests that private banks have not fully reassumed their traditional role as providers of trade finance.
Investment flows falling
According to UNCTAD, foreign direct investment flows have been plummeting. Following a 14 percent decline in 2008, FDI is projected to fall by 30 to 40 percent this year. Inflows to the 30 OECD countries might halve, to US$ 500 billion.
In the realm of government policy vis-à-vis foreign investment, however, the report noted that most changes undertaken by G20 members had the stated purpose of increasing openness and clarity for investors. For instance, Australia liberalised screening requirements, lowering costs for would-be foreign investors. Indonesia provided foreign investors with better services and fiscal facilities. Several governments also signed new bilateral investment treaties, or broader free trade agreements incorporating protections for foreign investors.
However, the report noted that the “sheer size” of emergency intervention in globalised sectors like finance and automobiles created “a strong presumption” that capital movements would be influenced. “Akin to subsidies, emergency measures may effectively create advantages for domestic sectors and put foreign players at a disadvantage,” it said. And as governments try to wind down crisis-prompted investments, there would be scope for them to favour domestic investors.
The study also gave a nod to so-called financial protectionism, noting that many governments have either urged or required banks receiving aid to be sensitive to the borrowing needs of domestic business.
Trade restrictions, and future distortions
The report found that, in the main, increased tariff and non-tariff barriers (such as licensing and labeling requirements) were concentrated in a relatively small number of sectors: agriculture, iron and steel, motor vehicles and parts, chemicals and plastics, and textiles.
The number of anti-dumping investigations initiated - a proxy for protectionist pressures exerted on governments by domestic business - was no higher than for the same period in 2008. However, the profile of countries taking this necessary precursor to imposing anti-dumping duties changed significantly: the number of investigations initiated by China almost quintupled, from three to 14. China is also a frequent target of anti-dumping investigations, for everything from mattress components to steel grating.
There was a dramatic increase in the number of investigations launched to determine whether safeguards, a different trade defence mechanism, could be used to restrict imports - from two in the first seven months of 2008, to 16 in 2009 (14 of which were by India).
The trade impact of fiscal stimulus and industrial and financial support programmes was hard to measure, the report acknowledged, due primarily to a lack of data about how the schemes are being implemented. It called attention to the potential long-term effects of these measures on fair competition. “The longer the subsidies remain in place, the more they will distort market-based production and investment decisions globally, the greater will become the threat of chronic trade distortions developing, and the more difficult it will become to correct those distortions,” it said, using the subsidy-rich agriculture sector as a case in point.
The report was followed by annexes containing a country-by-country description of trade-related measures, economic stimulus policies, financial sector support schemes, and investment-related policy changes made by G20 governments between April and August. Most of the information was either notified by the governments in question or publicly available.
Additional information
The WTO-OECD-UNCTAD Report on G-20 Trade and Investment Measures is available online at http://www.oecd.org/dataoecd/56/48/43689944.pdf.
ICTSD reporting.
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