11th March 2010

Bridges Weekly | G20 Countries Largely Resisting Protectionism: Report

Discuss this itemShare your views with other visitors, and read what they have to say

The world’s biggest economies introduced fewer measures to restrict trade flows in late 2009 and early 2010 than in the preceding year, according to a new report on trade and investment protectionism from the WTO, the United Nations, and the Organization for Economic Cooperation and Development (OECD).

But despite the “relatively muted” trade and investment policy response to the global recession, the report warned that the threat of increased protectionism remained very real, due to record unemployment levels and the uncertain economic recovery. It noted that “prolonged periods of job losses and unemployment” have driven protectionist measures in the past.

Released to governments and the public on 8 March, the report by officials from the WTO, the OECD, and the UN Conference on Trade and Development monitored the trade and investment policies of members of the Group of 20 leading industrialised and developing nations from September 2009 to mid-February 2010. The first such report, released last fall, examined policies in the year to September 2009.

At summits in Pittsburgh and London last year, G-20 leaders pledged to refrain from raising new barriers to investment or to trade in goods and services. The report shows that several G-20 countries did so anyway. The policies ranged from run-of-the-mill tariff increases in some cases to the launching of several anti-dumping investigations (although fewer in 2009 than in 2008). A few governments introduced more restrictive procurement practices, such as ‘buy domestic’ requirements, and non-tariff barriers (some of them rather exotic, such as an Indonesian rule stipulating that only Indonesian citizens based in the country have the right to import and sell alcoholic beverages there). Some 1,489 notifications of non-tariff barriers under the Agreement on Technical Barriers on Trade were notified to the WTO secretariat in 2009, compared to 1,272 in 2008.

However, the report took pains to underline the limited scope of the trade-restricting measures. The WTO secretariat estimates that the import restrictions introduced between September 2009 and mid-February 2010 cover 0.7 percent of total imports by G-20 countries (0.4 percent if fuel was removed from the calculation), compared to 1.3 percent in the year to October 2009. The report emphasised that the resulting reduction in trade was “considerably less,” apart from the case of some prohibitive restrictions. And many of the restrictions focused on minerals, metals, and textile products, sectors that tended to be relatively protected to begin with. The report noted that several governments took steps to increase openness to trade and investment flows.

The report also found no “open discrimination against foreign investors,” and “no major measure” to reduce access to G-20 markets in terms of services trade. However, it pointed to potential discriminatory effects arising from emergency government support to the financial and automobile sectors. “Emergency measures have politicised processes of firm exit and restructuring, and government holdings acquired as part of the crisis response may jeopardise governments’ impartiality in policy making and law enforcement,” it warned.

The previous edition of the report had also concluded that governments had been successful at containing protectionist pressures, but warned that crisis-related measure risked artificially altering market competition and investment decisions, with the threat of “chronic trade distortions.”

The new report outlined a sequence for governments to begin unwinding crisis-related measures, “when it is judged timely to do so.” Protectionist border measures should go first, ideally with multilateral coordination, followed by behind-the-border policies that discriminate between domestic and foreign goods or firms. Then, sector-specific measures should be tackled, particularly those that support capital rather than labour. Specific consumption subsidies should be next, with generic consumption measures like temporary cuts to value-added tax (VAT) rates last to go.

Data: trade recovering, but joblessness casts shadow

In addition to lengthy annexes detailing trade and investment measures taken by each country, along with descriptions of financial sector bailouts and general stimulus measures, the 85-page report provides data on trade volumes, GDP growth, and unemployment for G-20 members.

World merchandise trade is recovering from a 12 percent drop in 2009 that returned trade volumes to levels last seen in 2006, it shows, attributing much of the improvement to China and other East Asian countries. In December, world merchandise trade rose by 4.8 percent over the preceding month.

In the last quarter of 2009, developing countries in Asia, including China, enjoyed fast export and import growth, of 10 percent and 9.1 percent, respectively. Industrialised countries saw imports rise by 3.9 percent, while exports rose by 4.1 percent. But their export performance was variable: US and Japanese exports increased by around 8 to 9 percent, while Europe’s grew by only 2 percent. Africa - which was hit especially hard in 2009 by the drop in prices of the commodities that make up the bulk of its exports - saw both imports and exports decline in the final quarter of the year.

While the report concluded that G-20 governments’ attempts to catalyse more trade finance had met with considerable success, with the cost of trade finance in China, India, and Brazil almost half of what it was a year ago, credit remained hard to come by for small traders, particularly in Africa.

As for investment, foreign direct investment flows fell from US$1.7 trillion in 2008 to US$1 trillion in 2009, although there was a moderate pickup in the second and third quarters of the year.

Despite the positive developments, the WTO, the OECD, and UNCTAD stressed that there were clouds on the horizon. The economic recovery was fragile, and that large-scale unemployment could give rise to protectionist pressures. Some 27 million people around the world lost their jobs in 2009, taking the number of jobless to over 200 million and the global unemployment rate to its “highest level ever.”

They urged G-20 governments to “remain vigilant in opposing protectionism,” to devise exit strategies from crisis-related measures that had potential to distort trade, and to “work diligently and quickly” to conclude the long-struggling Doha Round trade talks. A Doha agreement, they suggested, would “strengthen the multilateral trading system and to improve multilateral market access.”

Levels of concern vary

Despite its warnings about the future, the WTO-OECD-UNCTAD report was fairly relaxed about the extent of protectionism that governments have introduced thus far. This view is shared by some analysts, such as Patrick Messerlin at the Groupe d’Economie Mondiale and the Institut d’Etudes Politiques in Paris, who believe that the current level of protectionism is modest, and that excessive warnings about it would weaken economists’ credence in the event of a serious trade war.

Simon Evenett, the director of Global Trade Alert, a service that provides real-time monitoring of protectionist policies along with their likely victims, is considerably less sanguine. He argues that the report’s assessment did not adequately reflect a wide range of government measures, often falling outside the jurisdiction of WTO rules, that served to distort production and trade.

These include subsidies to manufacturing industry and government procurement. The most recent report by the Global Trade Alert, released last month, noted that since September 2009, several major trading nations had taken “taken far-reaching measures that discriminate against foreign commercial interests,” often slipping unnoticed under the media radar screen. China, for example, had introduced a new accreditation procedure for firms wanting to bid for high-tech state contracts, and the US House of Representatives had approved further ‘Buy America’ provisions. Russia, a G-20 country that is not part of the WTO, has introduced a raft of tariff increases and industrial support measures.

According to the Global Trade Alert report, discriminatory measures against foreign commercial interests are above even generously defined historical trends (though below 1930s levels) in every major trading nation except Brazil and Canada.

Evenett, a professor of economics at the University of St. Gallen in Switzerland, told Bridges that while trade remedies such as anti-dumping duties lapse after a certain time period, procurement policies, subsidies, and other industrial policy measures tend not to - unless governments choose to unravel them.

Asked about the report’s estimate that a mere 0.7 percent of G-20 imports stood to be affected by increased protection, he said “They’ve looked at a small number of measures and got a small number. No surprise.”

ICTSD reporting.

More Bridges Weekly headlines

More ICTSD highlights