"Murky protectionism" and behind-the-border barriers: How big an issue? The €100 billion question

Lucian Cernat, Marlene Rosemarie Madsen 23 March 2011

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These days the world’s attention is fixated on major challenges and serious political events: the lethal combination of a massive earthquake, devastating tsunami, and extraordinary nuclear threats in Japan, the Arab Spring and in particular, the recent events in Libya. On the economic front, EU leaders are facing tough decisions on the future of the euro, closer economic policy coordination in the Eurozone, and financial stability in Europe.

Compared to these headline-grabbing events, dealing with “behind-the-border barriers” and keeping protectionist tendencies at bay might seem to be small potatoes – a low-priority policy objective that pales in front of such urgent and hugely important issues. Take the Eurozone issues, for instance. The Council has to deal with the conditions governing €440 billion lending capacity in favour of financially distressed Eurozone countries.

Protectionism is on the Council’s agenda

Yet, among such top political priorities, when EU Heads of States and Governments will meet on 24 March in Brussels for the regular Spring European Council, one agenda item in front of them will be a new report entitled "Trade and Investment Barriers Report 2011" released by the European Commission on trade policy priorities, as part of the global efforts to open up markets (European Commission 2011).

What can be so important on this front that would justify the attention of heads of states, particularly at such difficult times in the international arena?

After all, although a real threat to global recovery and a main culprit for the severe economic pain incurred during the Great Depression, protectionism was this time around largely contained. According to WTO estimates – one of the main institutions tasked to monitor and report back on protectionist measures – less than 1% of world trade was affected by crisis-related protectionist measures during the height of the crisis (WTO-OECD-UNCTAD 2010). Using a similar approach, the impact on total EU trade by border protectionism, with the notable exception of Russia, was also found to be relatively small (around 1.7% of total EU exports). Plus, after a sudden and painful collapse, world exports have bounced back with double-digit growth rates for many key trading nations. According to the European Commission, trade accounted for one-third of growth in Europe in 2010.

So, why worry?

What makes behind-the-border barriers – like the ones reported in the Commission report – of critical importance and in need for political attention is the importance of “murky protectionism”. While behind-the-border barriers and "murky protectionism" existed before the crisis occurred, the crisis has increased the appreciation of the need to address this kind of protectionism.

Understanding protectionism is like opening up a Russian doll. At the first level, protectionism is defined as border measures such as tariffs, quotas, import bans, export taxes, etc. But like a Russian doll, when looking deep inside, one can find several domestic policies that are tantamount to protectionism and discrimination. Non-tariff measures, discriminatory regulatory issues, subsidies, and “buy local” clauses can hamper severely trade flows. As the new EU trade strategy clearly states, the most important contribution to the Europe 2020 growth objectives will stem from the removal of non-tariff issues and beyond-the-border barriers affecting trade in goods, services, and FDI. Thus continuing to fight “murky protectionism”, whether crisis-related or not, is crucial for global economic recovery.

Avoiding “behind-the-border” protectionism – a key objective for EU trade policy

The economic and financial crisis increased the threat of countries using protectionist measures, and several voices have drawn particular attention to the threat of "murky protectionism" (see for example Baldwin and Evenett 2009 on this site).

Trade openness is an important objective in the EU public perception (European Commission 2010b). Trade is also a key driver of future economic prosperity in Europe. The new EU trade strategy launched in November 2010 (European Commission 2010c) puts forward the order of magnitude for the “triple benefit” trade could generate:

  • Growth: Finalising all the ongoing trade-agreement negotiations and making significant progress on strategic partnerships would lead by 2020 to a EU GDP level more than 1% higher (€150 billion per year)
  • Jobs: 36 million European jobs are, directly or indirectly, linked to trade and there has been a 7% wage premium as a result of trade-induced competitiveness
  • Consumer welfare: The average EU consumer gains around €600 per year from wider trade induced choice

In order to reap these benefits, it is crucial to ensure that markets are kept open and to address protectionist measures.

New evidence on restrictive measures

The latest Commission report shows that more than 330 trade restrictive measures in 30 partners has been reported covering border measures (e.g. tariff increases, licensing requirements) as well as behind the border measures (e.g. certification schemes, buy-national policies) (European Commission 2010a). The bulk of new measures has been imposed by a limited number of EU trading partners and were concentrated in a few types of measures.

Previous analysis made by DG Trade found that new border measures such as tariffs, quotas, import licenses, reference prices, and import bans have targeted around 1.7% of EU exports. Russia has been responsible for the introduction of measures that were worth almost 75% of the total value of EU global exports affected by protectionism. In total, the measures affected around 15.5% of total EU exports to Russia (see Cernat and Sousa 2010 on this site).

The European Commission’s latest response to "murky protectionism"

The European Commission actively monitors protectionism as part of a coordinated international response to the crisis. But tackling concrete and detailed trade barriers is not a dazzling task and it is hard to raise it on top of the political agenda. The Commission report, one of the first deliverables of the new EU trade strategy, tries to do exactly that. It takes a strong stance against a handful of “beyond-the-border” trade barriers in strategic trading partners for Europe and finds that they are likely to have a negative effect on around €100 billon of EU exports.

In previous analyses, due to lack of data, the European Commission did not attempt to quantify the most complex trade barriers. Based on a coordinated and comprehensive data collection effort, in its new Trade and Investment Barrier Report the Commission goes one step further and looks into the trade value potentially affected by behind-the-border discriminatory measures in its most important trading partners. The report identifies seven strategic countries (China, Russia, India, Brazil, Argentina, the US, and Japan) and six types of key barriers (Government procurement, intellectual property rights, Access to raw materials, services and investment, regulatory issues/standards, customs-related barriers) that are prevalent and most detrimental to EU trade.

Based on a simple methodology of matching detailed descriptions of the selected barriers from the EU delegations with trade statistics it is possible to get an idea of the size of the EU trade that is potentially affected by such barriers:

  • EU exports potentially affected by the selected export barriers are in the range of €100 billion, and
  • around €6 billion worth of EU imports face barriers concerning access to raw materials.

Two countries feature prominently, China and Russia, mainly due to intellectual property rights related barriers which could potentially cover a large share of our trade. Measuring border barriers is relatively straight forward.

It is more challenging estimating behind the border barriers and, of course, several caveats apply. Hence, these figures are an indication of the order of magnitude rather than exact estimates and are by many accounts underestimates since several barriers, such as those affecting government procurement and barriers on energy products, are not entirely accounted for. Furthermore, due to the nature of these barriers, it is not possible to provide estimates for the potential gain from removing them.

This means that the €100 billion should be read as the overall magnitude of "potentially affected" EU trade by "murky protectionism", and not as the size of EU "lost trade".

Government procurement: Addressing openness asymmetries

Public procurement is an important share of global GDP. In 2007, public procurement spending amounted to some 16% of GDP in the EU, 11% in the US and 18% in Japan. For emerging and developing economies data are scarce but in 2007 these government procurement markets were estimated to amount to around €212 billion in India, Brazil and Argentina put together. This may seem relatively small in absolute terms but these markets are expected to increase significantly in the future.

Moreover, a proliferation of protectionist measures in the area of public procurement occurred, after the financial and economic crisis (see for example European Commission 2010a). In some countries the share of government procurement has further increased as a result of crisis-related stimulus packages and public procurement markets remain significantly closed to foreign companies in many key EU partners.

Only 41 countries are parties to the Government Procurement Agreement. Among the selected EU strategic partners covered in the report, only the US and Japan are currently members, while China is in the process of negotiating its accession. However, even those countries that have signed up have negotiated important limits to their market opening commitments in the form of minimum thresholds or exclusions of sectors or entities (such as sub-federal).

The Government Procurement Agreement is characterised by asymmetry between what the different parties offer in terms of market access commitments, with the EU being significantly more open than the other parties. In 2007 the value of US procurement offered to foreign bidders is just €34 billion and €22 billion in Japan, compared to €312 billion in the EU (see European Commission 2010a),

Restrictions on raw materials

The report identifies five countries (China, Russia, Argentina, Brazil, and India) with respect to restrictions on access to raw materials. EU import data was matched with detailed descriptions of the barriers. Based on this methodology, the overall EU import of industrial and agricultural raw materials potentially affected by export restrictions is in the range of €6 billion.

These estimates do not include energy raw materials due to lack of comprehensive information on these barriers. Raw materials accounted for 33% of EU's imports, out of which energy raw materials represent 23% of EU's imports. The omission of energy raw materials is mainly relevant for Russia. Whilst detailed information is not yet available with respect to export restrictions on energy raw materials, it is clear that they are often critical. One example is a 30% export duty on gas from Russia, affecting 28% of total EU imports of gas.

Continued support for openness is key

The key message to EU political leaders is that, in difficult economic and political times, open trade and investment policies remain one of the cheapest and surest ways to sustained economic recovery. True, coordinated efforts by the G20, international monitoring, WTO rules and self-interest in a world governed by global production chains all played an important role in avoiding blatant and open protectionist measures such as tariff increases.

As the world's largest trading bloc and the most important source and destination of foreign direct investment the EU has an inherent interest in ensuring an open and fair global trading system, as a key ingredient to global economic recovery. This view is also supported by European citizens. The recent Trade Eurobarometer found that 65% of Europeans believe that the EU has benefited greatly from international trade. However, they are less confident about the future, as 71% think that trade will benefit more the emerging economies like Brazil, China, India, and Russia in the coming years (European Commission 2010b). These views may lead to protectionist tendencies, if Europe’s openness is perceived as being matched by EU’s strategic trading partners with “behind-the-border” policies acting as de facto discriminatory trade barriers. Protectionist tendencies may also complicate further other top political priorities, from Eurozone stability to international efforts to promote democracy in the Arab world, or Japan’s recovery. In this light, the Commission report on trade and investment barriers affecting €100 billion (10% of EU exports) worth of trade may not be a dazzling read but certainly belongs to the next European Summit’s economic agenda.

The views expressed herein are those of the authors and do not necessarily reflect the views of the European Commission or EU Member States. The authors would like to thank Marco Dueerkop and Nuno Sousa for useful comments.

References

Baldwin, R. And S. Evenett, The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20, March 2009, VoxEU.

Cernat, L and N. Sousa, The impact of crisis-driven protectionism on EU exports: The "Russian doll" effect, 9 January 2010, VoxEU.

European Commission (2010a), Seventh Report on Potentially Trade Restrictive Measures, May 2010 – September 2010, October 2010.

European Commission (2010b), TNS Opinion & Social, Special Eurobarometer Survey 357, Wave 74.1, November 2010.

European Commission (2010c), Trade as a Driver of Prosperity, Staff Working Paper accompanying the Commission’s Communication on “Trade, Growth and World Affairs”, November 2010.

European Commission (2011), Trade and Investment Barriers Report 2011 - Engaging our strategic economic partners on improved market access: priorities for action on breaking down barriers to trade, COM (2011) 114, March.
WTO-OECD-UNCTAD, Report on G20 Trade and Investment measures, March 2010
 

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Topics:  EU policies Europe's nations and regions International trade

Tags:  non-tariff barriers, international trade, protectionism