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The impact of protectionism–both outright and “murky”–on world trade will be highly dependent on the future course of the economic crisis. If the “green shoots” of an economic recovery blossom and bear fruit, then the (thus-far) moderate upsurge of protectionist government actions is likely to fade; if on the other hand, the world should plunge back into a “double dip” recession then all bets would be off.
Certainly, the absolute numbers chronicling the world economy from 2007 through 2009 are stark. World output slowed appreciably from 3.5 percent growth in 2007 to 1.7 percent in 2008. Then, for the first time since World War II, the World Bank predicts that in 2009 world GDP will decline (2.9 percent in the latest projection). Similarly, a decline in foreign direct investment flows began in 2008 and is projected to deepen in 2009, dropping some 30 percent in year-over-year numbers.
Trade figures were no exception to the negative trends. World trade by volume grew 6 percent in 2007, then by only 2 percent in 2008. For 2009, the projection is for an unprecedented decline of 11 percent.
As noted above, what is important is what happens next to the world economy and world trade. And on this question, economists differ. In a widely cited succession of analyses starting in April 2009, Barry Eichengreen and Kevin O’Rourke set out to demonstrate that “globally we are tracking or doing even worse than the Great Depression.” They present data for industrial production, global stock markets and trade volumes to support their thesis. At the same time, Eichengreen and O’Rourke also track governmental policy responses in the 1930s in contrast with the recent 2007-2009 period. Here, they find major differences, most particularly with central banks quickly and dramatically lowering discount rates and expanding the monetary supply; and elected governments undertaking expansionary fiscal policies and accepting fiscal deficits for the duration of the crisis. In their most recent analysis (September 1), the two economists concede that industrial production now “shows clear signs of recovering”, “global stock markets have mounted a sharp recovery” and the “downward spiral of global trade volumes has abated.” Still, they remain agnostic as to the future, arguing that “final demand” may not support the increased production and that consumer spending, particularly in the USA, may “remain weak” causing new inventory buildup, production cutbacks, and ultimately a double dip recession.
In contrast, another distinguished economist and historian of the Great Depression, Allan Meltzer, in a recent commentary decries the “greatly overstated and highly misleading” comparison of today’s economic situation with the experience of the Great Depression. Arguing that the United States is a key barometer and that the recession is likely to end this year, Meltzer points out that, utilizing the 1937-1938 “double dip” depression as illustrative, the 2007-2009 downturn has been much less devastating (though larger than most postwar recessions). He notes that since 2007 US industrial production has fallen only about 17 percent, compared to 32 percent in the earlier period; real GPD dropped only 3.8 percent, compared to 18.2 percent; and unemployment has climbed to 9.5 percent, compared to the earlier figures of 20 percent. Though he holds that most stimulus packages have been irrelevant and contain the seeds of long-term growth-depressing deficits and regulatory excess, Meltzer agrees with the consensus of “most economists” that the recession will end soon (“Keynesian economists always fail to recognize the regenerative forces of the market economy.”)
In the end, while they differ greatly in their analytic focus, Eichengreen and O’Rourke on the one hand, and Meltzer on the other hand, all found it plausible that the worst is over for the world economy–and that the pressures for protectionist measures may ease over the next several years. That being the case, it is still important to describe and understand the nature of modern protection and its impact thus far on world trade.
What follows is a brief review of the evidence thus far of new protectionist measures, both traditional (tariffs, WTO-legal trade remedies) and representative examples of so-called “murky” protectionist actions (subsidies, government procurement barriers).
Tariffs and Other Border Measures. As is well known, many WTO members, particularly developing countries, have applied tariffs that are substantially below the rates they have legally bound in GATT/WTO negotiations. This “policy space” theoretically could give them considerable leeway to raise border tariffs by a large margin: one study has estimated that full utilization of the “water” in the WTO tariff rules could nearly double existing MFN tariffs. Some countries (India, Argentina) have taken limited advantage of this flexibility. But by and large, to date there has not been large-scale use of the policy space afforded by the differential between bound and applied tariffs. A recent study by Olarreaga and others, based on the experience of the post-WTO world (1995-2008), predicts modest tariff increases in 2009 of about 8 percent. Similarly, in agriculture, a recent paper by Tim Josling and Stefan Tangerman notes that to date policy responses to the economic crisis have been “mild.” There have been a few tariff increases and the reactivation of export subsidies by several nations; but this has been offset by tariff reductions, decreasing export taxes and removing import bans in other cases. It should be noted, however, that, pending changes as a result of the Doha Round negotiations, most trade distorting measures in agriculture–domestic subsidies–and many export subsidies are still legal and thus not included in the current evaluations.
WTO-Legal Trade Remedies: Anti-dumping and Safeguard Measures. Various World Bank and WTO reports have chronicled the increased use of antidumping and safeguards measures over the past eighteen months as the financial crisis has deepened into a worldwide recession. The most thorough and complete accounting has been undertaken by trade economist Chad Bown of Brandeis University, utilizing a global antidumping data base constructed with support from the World Bank, the UK Department of International Development, and Brandeis University.
Bown has found that the worldwide downturn has demonstrated once again the strong link between economic bad times and increased use of trade remedies (antidumping and safeguards are highlighted here). He has found that product-level use of trade remedies jumped 34 percent from 2007 to 2008, and that the first quarter of 2009 was 22.3 percent higher than the first quarter of 2008. In addition, for the first half of 2009, the actual imposition of trade remedies upon completion of investigations was 30.5 percent higher than the first half of 2008. Further, there were several other striking findings regarding changes in trade remedy actions after the onset of the global crisis in late 2007. First, there was a huge increase in the number of actions pursued by developing countries: over 70 percent of the new actions from the beginning of 2008 to the present time were instituted by developing countries–often against other developing countries. Second, China has become the target of choice for many countries, both developed and developing. For country-specific antidumping, safeguards, and countervailing actions, China was the target roughly 40 percent of the time (and 70 percent of the time in 2009).
Finally, Bown also noted a spike in the use of safeguard actions as the financial crisis spread in 2008. Eight safeguard actions were initiated in the second half of 2008, with 15 more being added in the first half of 2009. He projects that 2009 may end up with the highest number of safeguard actions since the WTO was established in 1995; and in contrast to other peak years (2000, 2002), the steel industry will be joined by other industries as the target for such actions.
Bown calculates that the value of imports targeted by trade remedy actions among G-20 nations amounts to just under .5 percent of total imports. However, he also notes that the small first-order effects can be deceptive, in that a sizable literature has demonstrated that trade remedy tools can be utilized to generate anti-competitive effects, particularly in concentrated sectors such as steel and chemicals. Further, there is the danger of a cascading impact, as when several countries react to one country imposing trade remedy duties in order to prevent trade deflection.
Murky protection can take many forms. Trade economists Richard Baldwin and Simon Evenett utilize a broad, practical definition: “abuses of legitimate discretion which are used to discriminate against foreign goods, companies, workers, and investors.” Examples are wide-ranging and could include manipulation of health and safety regulations, licensing restrictions, “green” policies that both subsidize and protect domestic industries in the name of environmental goals, and discriminatory standards, among others. Given the space constraints for this essay, the following analysis will be confined to two examples of actions taken in pursuit of a particularly difficult and complex rationale for national discretion: policies publicly aimed at stemming or mitigating the world financial/economic crisis as it impacts domestic industries. Specifically, what has unfolded with regard to automobile industry subsidies and national government procurement policies. In both instances, while there are many culprits, the United States has become the chief object for analysis and criticism.
Sector Subsidies: the Automobile Industry. In June 2009, GM formally filed for bankruptcy, and the US government became its major stockholder after a bailout amounting to over $50 billion. While not alone in bailing out its automobile industry, the United States’ action, because of its scale, break with US national precedent, and likely duration, changed international rules and practice for sectoral intervention for the foreseeable future. President Barack Obama proclaimed that he had “no interest in running GM…our goal is to take a hands-off approach and get out quickly.” Yet, as virtually all outside observers have noted, the US government to date has no discernable exit strategy and is likely to control GM for some time. Thus, inevitably what had been private market decisions will become government-to-government negotiations: as examples, GM originally announced its intention to build roughly 50,000 subcompact cars in China, only to be forced to recant by combined pressure from US labor unions and US government overseers; pressure is also being exerted to distort and curtail elements of the North American market for auto parts by rewarding beleaguered US parts manufacturers over Mexican and Canadian companies. In each instance, protests and, ultimately, potential retaliatory actions will come after China, Mexico or Canada or other nations have exhausted talks with Washington–not Detroit.
While following separate paths–and not entirely influenced by the US–many other countries have intervened to aid their auto sectors, or are actively planning such interventions–including (not unexpectedly) Canada and Mexico; and various EU countries, including France, Germany, Britain, and Italy. Hiding behind the US action, French president Nicholas Sarkozy stated: “The situation in Europe means that you cannot accuse any country of being protectionist when the Americans put up $30 billion (he undercounted: author) to support their automotive industry.”
What does this portend for WTO subsidy rules? First, without getting into the weeds of WTO legalese, it is fairly certain that many of the government actions violate current subsidy tests, including making a “specific” financial contribution that confers a definite benefit to the receiving party, and causes “serious prejudice” to imports from foreign firms. Second, and of equal importance, given the fact that so many WTO members have mounted extensive and broad automobile industry bailouts, there is little likelihood that they will challenge other nations’ subsidy programs by bringing a WTO case.
This being the case, economists Brunel and Hufbauer offer a plausible outcome–one that is ominous for WTO disciplines: “As auto bailouts and aid continue and intensify without WTO challenges, the world auto industry could gradually leave the realm of WTO discipline. This would set a dangerous precedent. If an important industry, like autos, can take itself out of WTO disciplines, the world trading system will be seriously weakened.”
Government Procurement and Buy National (America): Many countries have provided stimulus packages to aid their industries and citizens in the face of the global economic crisis and recession. To many legislators–not steeped in trade law–it was natural to argue that public money appropriated to these ends should not be allowed to “leak” out of the domestic economy. While “buy national” provisions have long existed in many provincial or city laws and regulations, the United States led the way for national policies to mandate this rule. In January 2009, the US House of Representatives passed a stimulus bill that provided a 25 percent competitive margin for US iron and steel companies for all expenditures under the bill. After strong objections were raised by the EU and Canada, and after a mild protest from the Obama administration, the final version of the legislations both expanded the purview of the provision to all manufacturing sectors and provided a stipulation that the rule “be applied in a manner consistent with US obligations under international agreements.” In effect, what this meant was that nations that had signed the WTO Agreement on Government Procurement (12 EU countries plus 12 other nations) were exempt. All others–including such major trading nations as China, India, Brazil and Russia–were subject to restrictions.
A number of nations have either moved to retaliate with mirror “buy national” proposals or have threatened action–including China, Mexico and Canada (despite the possibility of exemption), the EU, and Japan, among others. It is difficult, if not impossible, to measure the actual trade effects of buy national regulations. In the United States, for instance, the issue has moved down to state and local governments, who have scrambled to insulate themselves against the possible denial of stimulus funds for projects that might include even a small percentage of foreign parts or components.
For exemptions, there is only an onerous and time-consuming process of petitioning individual US government agencies that have responsibility for that particular project.
Anecdotal evidence, however, points to a shift –particularly with regard to steel, chemicals and machinery.
As is the case with sectoral manufacturing subsides, it may very well be that no WTO member will challenge another WTO member over buy national provisions of stimulus packages. There are two reasons for this: one, many nations either have, or are contemplating, similar restrictions; and two, a WTO case would demand substantial legal resources, would take a long time before a final decision, and would present tricky legal questions regarding the dividing line between sovereign domestic rights and WTO obligations for national treatment.
What Is to Be Done?
For reasons laid out in the body of this essay, in the short term one should not expect recourse to the WTO, including the WTO dispute settlement system, for many of the trade-distorting actions that have emerged during the crisis. First, much that has taken place is not formally WTO-illegal: viz, antidumping and safeguard actions, increasing applied tariffs, some subsidies, some services restrictions, and some buy national provisions. Second, as we have seen with the most egregious subsidies for the automobile industry, many nations have launched aid programs and so will be reluctant to attempt actions against their trading partners. And third, while the crisis has highlighted the dangers from tariff “policy space” and from misuse of antidumping rules, the current Doha Round will certainly not take up these issues (or even additional subsidy restrictions) as part of its end-game agenda.
In the end, though the sentiment and phrase have become hackneyed and subject to ridicule, “naming and shaming” is the best (indeed only) recourse to counter existing and future trade distorting measures taken allegedly in the name of ameliorating the effects of the economic downturn. The G-20, for all its fault and questionable legitimacy, should continue to speak out against further protectionist actions. The work of the WTO and World Bank in analyzing and exposing protectionist measures should be stepped up and awarded even more resources.
In the end, however, the hope must be that individually and collectively, the major trading nations will “muddle through” and adopt enough sensible macro-economic measures to stem the negative economic tide and return to economic growth sometime in 2010.
Claude Barfield is a resident scholar at AEI.
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