Trade and the London Summit outcome

Richard Baldwin

04 April 2009

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The London Communiqué confirms that issues surrounding international trade have moved up the G20 agenda. The commitments made could have been much stronger, but I believe that what was agreed on protectionism can be graded as “not bad”. On the Doha Round, the Summit’s pledge was pitiful – it should be graded “very sad”. Yet, given the current disarray in the US’s trade policymaking machinery, it was perhaps the best that could have been accomplished.

What did they agree in London?

The commitments on trade fall into three basic categories:

  • Anti-protectionist pledges,
  • Reinforcing trade credit, and
  • Advancing the Doha talks.    

The anti-protectionist pledge   

The London Summit Communiqué is no weaker than the Washington Declaration – and in two important ways, it is stronger and more credible. As Table 1 (at the end of the column) shows, the general pledge is equivalent, and the specific “standstill” commitment is identical.

Of course, the Washington pledge turned out to be full of holes. A frequently cited World Bank study, first posted on Vox last month, listed 57 protectionist measures undertaken by G20 nations since their pledge. Nevertheless, I would say that the protectionism we’ve seen to date isn’t that bad. I don’t know any trade economist around the world who seriously argues that protectionism has been an important cause of collapsing trade. In this sense, the Washington pledge worked.

As former Mexican President Ernesto Zedillo argued on Vox last month, what we really need to do is postpone a protectionist spiral for the next 9 months – enough time for the macro stimulus time to start to work. If the economy recovers, protectionist pressures will fade on their own. If it doesn’t and the global economy stays in the doldrums for years, then we are going to need something a whole lot stronger than a G20 pledge to keep protectionism at bay.

Anti-protectionism and manipulation of political economy forces

How could the weak Washington pledge work even though it is riddled with loopholes? Liberal trade is always underpinned by a domestic political economy coalition that is strong enough to defeat domestic special interests that want protection. A major foundation of all such anti-protection coalitions is the “balance of terror”, i.e. the fear of each nation’s exporters that protection at home will trigger protection abroad. In this light, the Washington/London standstill pledge has reinforced the hand of anti-protectionist forces in all the G20 nations in two ways. First, it makes it very clear that this is a bargain –  “We won’t do it, if you don’t” – behind which is the implicit threat, “If you do it, so will we.” Second, the standstill pledge gives the anti-protection political economy forces inside each G20 nation more ammunition in the domestic debate. The national leader has made a pledge not to raise barriers. That is an excellent bullet point to start off the anti-protection argument inside each nation.

New commitments on anti-protectionism

The Washington Declaration was clearly written by people who had limited knowledge of the world of trade diplomacy. The G20 was set up and run by Finance Ministry and Central Bank types – the head of the WTO wasn’t even invited to the 15 November 2008 summit. The Washington Declaration seemed to have been written by economists and officials who buy into the protectionism-is-bad school of thought but have no experience in managing protectionist pressures.

By contrast, the London Summit Communiqué has a number of classic WTO elements. This time they brought along the pros. These new elements are important in ways that not might be obvious to non-experts.

Despite what is commonly understood by non-experts, the WTO is not an organisation that promotes free trade per se. It is an organisation that: 1) disciplines protection in a way that reduces its harm to other nations and reduces the chances of a retaliatory spiral, and 2) fosters the balanced, reciprocal, and mutually beneficial reduction of trade barriers. This realpolitik perspective is what has allowed the WTO to be so successful in its 60-year history. Such realpolitik fingerprints are all over the London Communiqué.

In the London Communiqué G20 leaders promised to:

  • refrain from imposing new protection,

But the Communiqué admits that – regardless of their pledges – nations will impose some new protectionism; it therefore includes disciplines on these. This includes pledges to

  • minimise negative trade effects
  • notify such measure to the WTO, and
  • promote monitoring and public reporting of new protectionist measures.

This combination of standstill + least-trade-distorting + notification + monitoring is one of the classic approaches trade diplomats take in the face of irresistible protectionist pressures. Trade diplomats admit that protection will happen, but instead of going the strict Prohibition route, they attempt to guide it, diminish it, and channel it into less harmful forms.

Why notification and monitoring matter for trade barriers

Notification and monitoring are very important. These pledges are why I believe that we can consider the London anti-protection pledge to be more solid than the Washington pledge.

The key point is the utter non-transparency and mind-numbing detail of modern protectionism. While we still do see tariffs and quotas (especially in developing nations) much of today’s protectionism – and almost all of the protectionism that has been imposed by rich nations since the crisis began – is “murky”. This protectionism is typically not a direct violation of WTO obligations. It abuses legitimately-created discretion in a way that discriminates against foreign goods, companies, workers and investors. Examples include abuses of health and safety regulations and endless subtle clauses in stimulus and bailout packages that favour domestic producers.

This detail and obscurity means that most of the protectionism we are seeing is way below the media’s radar screen. As a result, we do not get the countervailing forces that appeared when the US Congress tried to slip a hard “Buy America” clause in the stimulus and bailout packages.

Notification and monitoring are the way to get the protection back on the political radar screens. This reduces the scope for protectionist forces to slip in new protection unnoticed. Once it is clear that new protection will be noticed, the “balance of terror” can play much more forcefully to the hand of domestic anti-protectionist forces inside every G20 nations. Again, the way you have to look at these things is to understand how they alter the domestic political economy forces that generate the protection in the first place. 

Rectification

If one were looking to ridicule the London Communiqué, an excellent place to start would be the juxtaposition of the standstill and rollback pledges. In one breath, they say they won’t protect and in the next breath they say remove the protection they put on.

But this is only a contradiction in a world of absolutes. In the trade diplomat’s approach to the world, it is not a contradiction, it is realpolitik. It's akin to giving condoms to teenagers to prevent HIV, even as you preach chastity to them. WTO pros know that protection happens. What the world needs is procedures and rules to reduce the damage. The pledge “to rectify” any protectionist measure that slip through the standstill pledge is one such rule. Although this formulation of the “rollback” or “sunset” clause is particularly weak (e.g. there is no timeline associated with rectification), it is a step forward. It makes the whole anti-protectionist pledge more credible.

Trade credit and trade facilitation

One of the headline commitments in the London Communiqué concerns trade credit financing. The role of trade credit in fostering the collapse of world trade is subject to dispute among experts. I know of at least three groups of researchers that are trying to determine the causes of the trade collapse. While there is abundant anecdotal evidence, none of these researchers have come up with clear evidence that the lack of trade credit is a major cause of the collapse (although it surely matters for some exports from poor nations, especially in commodities).

Be that as it may, bolstering trade credit is one of the things G20 leaders could do to dampen the impact of the crisis on world trade and thus reduce the extent to which this rich-world crisis is harming the livelihoods of poor people in poor nations.

The politics of this is also great. Indeed, it is so great that a great deal of support for trade financing had already been put in place before the London Summit. (See the chapter on trade credit financing for examples by the WTO’s trade credit expert, Marc Auboin in the recent Vox book on trade and the crisis). Chris Giles of the Financial Times provides some numbers on how much of the London Communiqué figures represent new and real money. 

The basic political economy logic is a corollary of the anti-protectionism point above. Exporters in G20 nations are typically politically powerful; leaders like to promote exports. Moreover, the companies buying the exports are typically happy to have them and are also often politically powerful. Indeed, in many developed and emerging economies, the biggest exporting companies are also some of the biggest importing companies. There is consequently little political opposition to underwriting the credit that greases the wheels of international commerce. The regional development banks, the IMF, and indeed a number of individual G20 nations (Japan, China and the US in particular) have extended or enlarged their trade credit guarantee programmes. One problem is that trade volumes are falling so fast, it is hard to tell whether the falling issuance of trade credit is a supply-side or a demand-side phenomenon.

Doha

While the London Communiqué can be classified as a success in the standstill area, it is a letdown when it comes to the Doha Round. As the comparison in Table 1 shows, London was a much weaker commitment than Washington. The 15 November 2008 Declaration mentioned a very specific goal (getting modalities in place) and it mentioned a specific date (by the end of the year).

As history would have it, the Washington pledge came to nought over a very specific disagreement between India and the US. It is sad, however, that the London Summit couldn’t have been more specific. 

What more could be have been done?

This is exactly the question that Simon Evenett and I posed to a large group of trade experts in the book we published last month on Vox (“The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20,”). A large group of the concrete proposals suggested fall into two categories:

  • Standstills and surveillance
  • Exit strategies

The first category includes commitments such as those agreed, but goes much further in specificity of banned measures and the nature of the monitoring or surveillance. The second category is essentially a more precise and explicit form of the “rectify” pledge made in London. In particular, it argues that leaders should have committed in advance to talks that would remove the crisis-linked protection after the storm had passed.

Conclusion

Given the constraints and conflicts in other areas such as fiscal stimulus and financial regulation, the outcome of the London Summit on trade is pretty good. This is especially true since it is hard to argue that trade policy failures have had anything to do with the crisis – at least so far. The spectacular failure of banks put regulation high on the agenda. The nose-diving economy put macro stimulus on the agenda. While trade is collapsing globally, we have no “smoking gun” when it comes to protectionism or the Doha Round. The G20 leaders were trying to prevent bad things from happening and that is always a harder sell politically.




Table 1. The anti-protectionist pledges: London and Washington side-by-side
 

London Communiqué
2 April 2009

Washington Declaration
15 November 2008
Header

Resisting protectionism and promoting global trade and investment

Commitment to an Open Global Economy
Preamble

22. World trade growth has underpinned rising prosperity for half a century. But it is now falling for the first time in 25 years.

12. We recognize that these reforms will only be successful if grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems. These principles are essential to economic growth and prosperity and have lifted millions out of poverty, and have significantly raised the global standard of living.

Why trade collapsing?

Falling demand is exacerbated by growing protectionist pressures and a withdrawal of trade credit.

 

Anti-protection pledge

Reinvigorating world trade and investment is essential for restoring global growth. We will not repeat the historic mistakes of protectionism of previous eras. To this end:

13. We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty.

Standstill

… we reaffirm the commitment made in Washington: to refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports.  

In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports.

Rollback
In addition we will rectify promptly any such measures.
 
Extension
We extend this pledge to the end of 2010;
 

Least trade distorting

we will minimise any negative impact on trade and investment of our domestic policy actions including fiscal policy and action in support of the financial sector.

 

Financial protectionism

We will not retreat into financial protectionism, particularly measures that constrain worldwide capital flows, especially to developing countries;

 
Notification
we will notify promptly the WTO of any such measures
 
Monitoring

we call on the WTO, together with other international bodies, within their respective mandates, to monitor and report publicly on our adherence to these undertakings on a quarterly basis;

 
Trade facilitation

we will take, at the same time, whatever steps we can to promote and facilitate trade and investment; and

 
Trade credit

we will ensure availability of at least $250 billion over the next two years to support trade finance through our export credit and investment agencies and through the MDBs. We also ask our regulators to make use of available flexibility in capital requirements for trade finance.

 
DDA

23. We remain committed to reaching an ambitious and balanced conclusion to the Doha Development Round, which is urgently needed. This could boost the global economy by at least $150 billion per annum. To achieve this we are committed to building on the progress already made, including with regard to modalities.

Further, we shall strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO's Doha Development Agenda with an ambitious and balanced outcome.

 

24. We will give renewed focus and political attention to this critical issue in the coming period and will use our continuing work and all international meetings that are relevant to drive progress.

We instruct our Trade Ministers to achieve this objective and stand ready to assist directly, as necessary. We also agree that our countries have the largest stake in the global trading system and therefore each must make the positive contributions necessary to achieve such an outcome.

No competitive devaluation

In macro section paragraph 12 "We will … refrain from competitive devaluation of our currencies …"

 

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Topics:  Global crisis

Tags:  trade, G20 Summit, global crisis debate, murky protectionism

Professor of International Economics, Graduate Institute, Geneva; President of CEPR; Vox Editor-in-Chief

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