Trade seems to have has slipped far down the G20 leaders list of priorities. The new ebook, “The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20,” argues that this is a mistake.
Trade is experiencing a sudden, severe and globally synchronised collapse (see Figure 1). Protectionist forces have already emerged and will strengthen as the recession worsens. But it is not 1930s-style protection. Governments’ crisis-fighting measures have spawned new, murkier forms of protection which discriminate against foreign firms, workers and investors – often in subtle ways. The use of WTO-legal protection, such as antidumping measures, is also up sharply.
Figure 1: The Collapse in world trade.
Protectionism is not yet a cause of trade’s freefall
This creeping protection is not yet a major cause of falling trade – at this point it is a consequence not a cause (the global nature of supply chains and a lack of trade credit are the culprits). But history teaches us that protection does not move linearly. The authors – a list of eminent thinkers and practitioners which includes Australian Trade Minister Simon Crean and former Mexican President Ernesto Zedillo – are worried about this trend and the threat it would pose to the global recovery.
President Zedillo writes:
What we do know with certainty is that protectionism could derail all those efforts applied on the fiscal and monetary fronts… it would be irresponsible not to recognise that the mercantilist spectre is knocking at everybody’s door. … as the recession gets worse, protectionist forces will become even stronger. A perverse cycle of feedback between recession and protectionism is no longer an historical reminiscence of the 1930s but a possible scenario now – hopefully still with a low probability – in the months and years to come.
Minister Crean writes:
To ensure we get the biggest bang for our buck, we need to ensure the benefits of our stimulus and rescue packages can flow across borders, so that all can benefit from the actions we take individually. G20 leadership by example is essential to create a virtuous cycle in which countries lift each other up rather than pull each other down through protectionism. From ‘beggar-thy-neighbour’ to ‘nurture-thy-neighbour’.
Having invested hundreds of billions in bailouts and stimulus packages to counter falling domestic demand, it is foolish to risk triggering further falls in another major source of demand, namely exports. G20 leaders should, for once, get ahead of the crisis and take steps to prevent murky protectionism from threatening the global recovery.
What is murky protectionism?
Most examples of murky protectionism witnessed in recent months are not direct violations of WTO obligations; they are abuses of legitimately-created discretion which are used to discriminate against foreign goods, companies, workers and investors. Examples include abuses of health and safety regulations and clauses in stimulus packages that confine spending increases to domestic producers. For example, the Ebook's chapter on ‘green protectionism’ reproduces verbatim a clause in the recent US stimulus legislation that appropriates funds for advanced batteries and components, but only for manufacturers located in the US.
The recent bailout packages are another source of murky protectionism. For example, UK banks receiving bailouts were encouraged to redirect lending towards the home market; French banks were encouraged to lend to airlines that might otherwise cancel Airbus orders.
The murky nature of this protection makes it hard to enumerate. Worse, the lack of transparency makes it harder for politicians to resist retaliation against a trading partner's measures. The automotive sector bailouts announced or discussed following the US discussion evidence a deliberate pattern of retaliation/reaction. After the US started talks on a massive bailout of US automakers, Britain, Canada, France, Germany, Italy, Russia, Sweden and China are all considering or have implemented auto-industry bailout measures. President Sarkozy recently remarked "The situation in Europe means that you cannot accuse any country of being protectionist when the Americans put up $30 billion to support their automotive industry."
What should leaders at the G20 summit do?
Protectionism is creeping into national policies and trade volumes are collapsing, bringing down manufacturing employment. So far the causality is one way; apart from the bank and auto sectors, protectionism is reacting to job losses, not other nations’ protection. The authors propose a number of preventive measures that G20 leaders should embrace to ensure that this somewhat benign situation does not deteriorate.
As President Zedillo stresses, time is of the essence. To allow the stimulus packages to work, to allow trade to start to play a positive-feedback role, it is crucial that a protectionist spiral is avoided – especially during the next nine months when governments are hoping their stimulus spending will begin turning around the global slump. The concrete proposals fall into five categories:
- Standstills and surveillance
- Exit strategies
- Zedillo’s ‘aggressive deterrence’ approach
- Getting Doha back on track
- Resisting green protectionism
The first proposals essentially suggest a strengthening and amplifications of what G20 leaders agreed in their 15 November 2008 Washington Declaration.
Standstills and surveillance
The G20 current standstill on protectionism, agreed less than five months ago in Washington has lost much of its force. Leaders' credibility on trade is in tatters. While no one has imposed across-the-board trade restrictions, many national economic recovery programmes contain discriminatory measures.
One chapter– jointly authored by renowned trade experts from India, China, Brazil, Costa Rica, Britain and Germany – proposes a very specific strengthening of the G20’s protection standstill contained in the Washington declaration. This “Protocol on state intervention during the current global economic downturn” covers the new, murkier forms of protection as well as traditional discriminatory measures, and it proposes that the commitment be backed up a tough real-time surveillance mechanism. The goal is not to stop government from intervening, but rather to encourage them to stick to the non-discrimination principle when designing and implementing measures to promote economic recovery.
There is also widespread agreement among authors that heightened surveillance is necessary – a mechanism that provides rapid identification of potentially harmful measures. As the chapter by Peter Gallagher and Andrew Stoler argues, rapid identification is important to allow political pressure to dissuade governments. The prime example here is how foreign pressure (and US exporters’ fear of retaliation) managed to eliminate the most egregious features of the US’s “Buy American” clause in its recent stimulus package. While the media can bring to light the largest, most obvious protectionist measures, much of the murky protectionism is buried in the details of stimulus and bailout packages. Shining daylight on these devil-in-the-detail measures will require a more systematic, more professional effort.
The world is seeing one of the largest peacetime expansions of government intervention in the economy. It is an iron law of politics that such an increase will be accompanied by measures that favour domestic parties over foreign parties. It is another that temporary measures have a nasty habit of becoming permanent, morphing their purpose along the way.
While there is often a case for extraordinary measures during a global economic crisis, G20 leaders must make sure that the beneficial reforms of the past 20 years are not reversed. Urgent thought should be given to putting in place the review mechanisms that will encourage the orderly, unwinding of temporary measures taken during the crisis, in particular those measures that discriminate against foreign firms, subsidiaries, and workers.
The boldest proposal in this Ebook would not require any international coordination by the G20 or any other body. The logic flows from the old Roman expression, “If you want peace, prepare for war”.
Ernesto Zedillo, the former President of Mexico puts it bluntly: “pledges to avoid protectionism by leaders or other high-level officials are always welcome, but as recent events have shown, sooner rather than later, those pledges are blown away by the wind of domestic political pressures … The only thing that will make leaders think twice about whether or not to fall into the temptation of pleasing a particular constituency with protectionism will be the possibility that, as a consequence of such an action, another of its political constituencies will end up being seriously hurt.”
He suggests that countries pledge to use whatever legal means they have at their disposal to retaliate against others for protectionist actions that harm their exports. “All you need,” he writes, “is one major trade partner to commit to retaliation for others to follow suit … We need tough love, not sweet words in our present circumstances.”
Get Doha back on track
Many contributors agreed that getting the Doha talks back on track was critical. While the actual liberalisation is years down the road, this buttressing of the WTO-centric trade system and its rules would be one of the most important ways of reducing protectionism’s threat to the global recovery. This crisis – and the lack of old-fashioned protectionism – clearly demonstrates the value of the WTO-based multilateral trading system.
In his capstone essay, President Zedillo captures the consensus by arguing that G20 leaders need to “descend” to the lowly task of deal making. They should show up at the London Summit fully briefed on the most contentious issues, and proceed to outline compromises. This should be followed by an unequivocal commitment to re-launch the negotiations and do whatever necessary to have their Ministers deliver the so-called modalities by early Summer 2009.
Resist green protectionism – or pay the price at Copenhagen
A final and very important point is made in a chapter on "green protectionism." Many G20 leaders say they want a climate change deal at Copenhagen summit in December 2009.
Most indications are that a climate-change deal would involve the introduction of complex new taxes and schemes. Given the inevitable uncertainties and evolving nature of the challenges, such schemes must involve substantial discretion if they are to be properly implemented. It is very naïve to think that developing country governments – whose assent is needed to conclude a climate change deal – will cooperate if they feel that the discretion associated with existing environmental policies in industrialised countries was misused to shut out imports during the current global economic downturn. A developing country veto of a strong climate change deal may well be the price of crisis-induced green protectionism.
G20 policymakers need to bear this in mind and instruct their government officials to implement environmental initiatives in a manner that not only puts foreign firms on an equal footing with domestic firms but also is seen to do so. Just like other forms of murky protectionism, being seen to give equal treatment is almost as important as granting such treatment in the first place.
Today’s crisis is very different than the one facing global leaders at their November 2008. Then, the crisis was, or at least was perceived as being, mostly a financial crisis – and mostly confined to the G7 economies. To use a military analogy, it was as if the crisis was a landmine that the US and European economies had stepped on. Because the landmine had also been ‘planted’ by US and European financial markets, Brazil, India, China, South Africa and other emerging nations at the November 2008 meeting seemed only indirectly concerned.
In the past six months, the “landmine crisis” has become a “cluster-bomb crisis” – throwing recession-inducing projectiles in every direction. While G7 financial rescue and macro stimulus efforts must be at the heart of the world’s response, many G20 nations – perhaps a majority – are bystanders in discussions of massive stimulus packages and fundamental reform of the world’s most sophisticated financial practices. Trade, by contrast, concerns all G20 nations.
This simple truth seems to have escaped the attention it deserves – perhaps because the G20 process is guided by Finance Ministries and Central Banks. Whatever the reason, it is odd that the emerging-economy members of the G20 have not insisted on a higher profile for trade issues that affect them much more immediately than agenda items such as financial reform or long drawn-out efforts to readjust the ‘shares and chairs’ at the IMF, World Bank and other international financial institutions.
The world has changed and agenda priorities need to change; trade needs to be pushed higher up the list of priorities. It is critical that G20 leaders get ahead of the crisis and agree cooperation that prevents murky protectionism and plummeting exports from threatening the global recovery.