Thursday, November 1, 2012

The Fallacy of Protectionism

Closing off markets does not protect after crises

Protectionism has been described as "the dog that didn't bark" in the long, troubled night of the financial crisis; remarkable precisely because of its absence.

In the years since the crisis erupted, the world economy has borne witness to spiking unemployment levels, to Europe's debt woes, rising food prices, sluggish growth in the United States and now a slowdown in the emerging countries. But one feared scenario has not materialized: a big wave of 1930s-style trade protectionism.

In late 2008, with financial markets in free fall, many dreaded a repeat of the Great Depression, complete with spiral of tit-for-tat trade restrictions. Global trade was collapsing at a startling pace, squeezed by declining demand, plummeting commodity prices and a credit crunch-induced scarcity of trade finance. In the space of six months, world merchandise trade fell by almost 20 percent, wiping away nearly four years' worth of growth.

To be sure, there have been worrying signs of the traditional propensity of nation-states to turn inwards when the global economic outlook is bad. Some major economies introduced a raft of restrictive measures, such as trade remedies, new licensing requirements for imports and state aid to industry. The aggregate scope of these measures, however, has been limited.

Why was this?

First, governments understood that fiscal and monetary policies can stimulate domestic demand, and used both to considerable effect. In the early 1930s, as many economists have noted, most governments were still trapped in fiscal and monetary orthodoxy. Tariffs were one of few policy levers visible to them – a leve
r that many pulled, in desperation to show that they were doing something about mass unemployment.

Second, two decades of rapid international integration – and, crucially, awareness of growing interdependence – meant that policymakers appreciated the merits of keeping economies open.

This interdependence is linked to the final important factor that contained protectionism in the midst of the crisis: the rules, norms, and transparency offered by the World Trade Organization.

The internationalization of production that had so visibly bound economies together prior to the crisis was underpinned by the predictable trading environment provided by WTO rules. When the crisis broke, the WTO's combination of monitoring and surveillance and a firm framework of rules worked to deter knee-jerk protectionism.

Since January 2009, the WTO has issued regular reports on governments' use of trade restrictive measures. Together with the United Nations and the Organization for Economic Co-operation and Development, the WTO monitors how the Group of 20 leading economies comply with their pledges to refrain from trade and investment protectionism, documenting new policies to restrict or facilitate trade.

In sum, trade tensions have increased, but trade wars have been absent. Governments introducing import barriers have, in the main, cited the WTO rulebook to justify the moves. Countries feeling wronged by the measures have responded not with unilateral retaliation, but by using the WTO's well-tested litigation procedures. The WTO has proved its worth as a collective insurance policy against the disorder of unilateral action.

Yet we cannot be complacent. Dark clouds loom on the horizon for trade. Gloomy growth forecasts suggest that export demand may fall short of governments’ hopes. The WTO recently had to revise downward projections for trade volume growth in 2012 to 2.5 percent, down from 3.7 percent in spring. So long as unemployment remains stubbornly high – the International Labor Organization forecasts that in 2013 an additional 7 million people will join the 200-million-strong ranks of the unemployed – pressure to curb imports will persist. In addition, many major economies are already testing the political limits on the use of fiscal and monetary stimulus. If policymakers feel that these policy options have run their course, protectionism may regain its allure.

Already there is growing cause for concern. Our monitoring work indicates that governments continue to introduce new trade restrictions without stepping up the removal of older measures. The trade restricting measures introduced by G-20 governments since October 2008 now cover almost 3 percent of total world merchandise commerce – an amount roughly double Brazil's share in global trade. Trade restrictions have a tendency to shift from temporary crisis-fighting measures to industrial policies that are more difficult to unwind. Procedural and administrative roadblocks at borders are making traders' costs unpredictable. Perhaps more ominously, protectionist rhetoric favouring import substitution as a growth strategy is enjoying a revival even in some G-20 member countries

The visible danger today is of a gradual but steady erosion of the benefits of trade openness.

The irony is that in the modern global economy, creeping protectionism is not a successful recipe for achieving its main goal, that is, to boost exports. Thanks to the dramatic rise in the fragmentation of production across countries, the import content of exported goods has doubled in the past 20 years to 40 percent. Intermediate goods, not final products, now account for more than half of global trade.

We no longer trade in products, but in tasks. In a world of global value chains and ‘Made in the World’ products, impeding imports amounts to shooting your own exporters in the foot. Consumers struggling with stagnant wages would see their purchasing power weakened further. Developing countries could see hard-won gains rolled back.

If governments are to maximize the contribution of trade to better jobs and improved living standards, they must reframe the narrative surrounding it. The traditional “imports bad/exports good” framework needs to give way to “export success depends also on easy access to imports.” The focus must be on adding value, not crude bilateral trade balances. To support such efforts, the WTO has been working with partners such as the OECD to develop statistics that reflect trade in value added; the first batch of numbers is due in December.

In the shorter term, there are concrete steps governments could take to keep international trade flowing. Unwinding recent restrictions is an obvious starting point. Although the broader Doha Round negotiations are currently at an impasse, countries could move forward towards a WTO agreement on trade facilitation, which would lower trading costs by slashing customs-related red tape and simplifying border procedures for traded merchandise. They could cooperate on how to minimize the trade costs or distortions arising from divergence in non-tariff measures without compromising the pursuit of health, safety or environmental objectives. Governments could also work together with the Basel regulators to ensure that much-needed banking sector regulations do not unintentionally make trade finance less available and affordable, especially for poor countries.

Over the long run, domestic social policy will be central to resisting protectionist backlashes and keeping trade open. Trade will always be vulnerable if the efficiencies it creates are perceived to benefit only a fortunate minority. Government action can help equip people to profit from the global marketplace, cushion the blows of creative destruction and curb inequality.

A crisis is an opportunity to learn. In a world where protectionism does not protect governments must take more sophisticated approaches to supporting domestic growth and social protection. It is important that this be one of the fundamental lessons that we collectively learn from this crisis.

(Pascal Lamy is director-general of the World Trade Organization. This is reprinted with permission from the Yale University Center for the Study of Globalization)

1 comment:

  1. (Pascal Lamy is director-general of the World Trade Organization. This is reprinted with permission from the Yale University Center for the Study of Globalization) I favor his views, reminding that authors and diplomats have that job common point, they spend their lives inventing stories & luxury travelling them round the globe selling. Sure beats home in mundane suburbia with wife's cooking and nagging (protect, open-up, free-up, restrict, ban, tax, subsidize) sheer poetry to the diplomat. The fact no one tells is the West had devices that replaced dwindling population growth consumers with smashed up poor peasant importers. But then came automation to fill demand gap, later overproduction so Hollywood marketing by export take-up, creating un-employment & huge 1%'rs profit hoarding, loss of domestic demand. Industry want more, turn to film, DVD now internet and the peasant nations wake up, we sell them technology, machines & finance their productivity growth, they become sellers more than buyers, our cost/prices now too high we fall they rise. We must resort to more diplomat product in devices of restriction, subsidy, dumping duty and more rhetoric laws.

    The end of the day supply & demand ~ barter was a problem with baker selling for coffins and buying vegetables, power & flour, coal & bowls, with coffins made a transport and book keeping cost of some difficulty. So money was 'made round, to go round', in lieu of barter goods going round and back for timber & nails.

    We are supposed to buy what we make, not export our problems to wealth hoard by further ripping off the poor jungle bunnies. Now they see our game they do it back cheaper and our domestic sales dry up, we call that recession, depression & bankruptcy. But now they have our productive automation replacing their consumer man with fuel consumer machines and a world power/fuel deficit risking life, environment and life fuel food, so we invent GMO's and chemical labor substitutes roundup and farm labor short of disposable income to consume product and machines can't eat their own product to go round they want more fossil fuel or cremated bodies.

    Unless we are to populate the moon & Mars and get back the 10 baby families for future consumers the supply & demand balance will be lost forever. The other alternative (as in 1829, 1929 and latest 2019/29?) make wars and destroy existing to create rebuilding necessity anhd consumption growth at home. Our rich will never stop collecting as is capital worth & -V- labor small worth consumption drop will come in 100 year Professor Kondratiev Wave theory cycles. Why? Because we will never cut our cloth to measure and diplomatic authors will never stop inventing and selling stories.

    The Worlds great milestone By 1729, when Newcomen died, his engines had spread (first) to Hungary in 1722, Germany, Austria, and Sweden. A total of 110 are known to have been built by 1733 when the joint patent expired and by 1750 Industrial Revolution period till 1850 with 1829 depression resulting. The changes were in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times leading to thrashing machines then led to the 1830 agricultural rebellion of the Swing Riots. As late as the year 1900, most industrial workers in the United States still worked a 10-hour day (12 hours in the steel industry), yet earned from 20 to 40 percent less than the minimum deemed necessary for a decent life. Was 2000 not similar as now but with 47% Romney says living off the State, we say below poverty line again? Internet speeded will not 2019-29 be a repeat depression. OWS say we need an de-mechanization revolt, I say an "Un-Industrial Revolution" the appropriate word? Machine replaced man wag with fuel shortage and we must replace machine with man labor for fuel and environment improvement, cap global warming conserve fuel for transport. .