Policy Responses to the Crisis: Implications for the WTO and International Cooperation

Simon Evenett, Bernard Hoekman

06 July 2009

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For the first time since World War II, global GDP will decline this year (by an expected 2.9%). Developing countries growth will fall to 1.2% from 5.9% in 2008 (World Bank 2009). Worse, once China and India are excluded, the remaining developing economies will shrink on average by 1.6%, revealing the extent to which the crisis has hit developing countries. Net private capital flows to developing countries are predicted to drop by some $800 billion from the 2007 peak; with overall FDI inflows projected to fall some 30% compared to 2008. Global trade volumes are expected to decline by some 10% in 2009; the worst decline in trade since the 1930s. This year has seen the effects of this crisis go global.

Trade as a vector of transmission

Even though trade didn't trigger the crisis, the various layers of global economic interdependence ensure that trade played a role in transmitting demand slumps and finance shortages. But trade can also be an important vector of recovery so long as an open trade regime is maintained. At the 2 April 2009 London Summit, the G20 countries promised to refrain from raising new barriers and to minimize any negative impact on trade and investment of policy responses to the crisis. The systemic risks of a resort to protectionist policies are generally recognized by world leaders. The 1930s, as well as the more recent extensive resort to protectionism in the early 1980s recession ("voluntary" export restraints for cars, quotas on textiles and steel) illustrate that if some major countries put in place measures to close domestic markets, the risk of others following is high. What is most important is that all major trading partners hold the line and maintain open markets.

New research: Multilateral disciplines are working

A recent joint World Bank-CEPR conference assessed the prevalence and cross-border effects of the different policy responses put in place by governments to the crisis.1 The conclusions that emerged (see the e-book here) were “so far so good." Although a growing number of countries have put in place some protectionist measures, to date we have not observed large scale increases in the level of discrimination against foreign suppliers of goods and services by major trading states. Indeed some countries, such as Mexico, have responded by reducing tariffs and other barriers to trade.

The evidence to date is that where multilateral disciplines exist, recourse to protectionism has been limited. Some countries have utilized the "policy space" they have to raise tariffs, but projections – based on past behaviour – are that any such increases are likely to remain limited: In a sector that in the 1970s and 1980s became a bastion of protectionism, textiles and apparel, policy remains very open. Another illustration of the relevance of WTO rules is that countries that are not members are among those that have made the most intensive use of measures to restrict trade and/or investment – e.g., Algeria, Russia.

Insofar as protectionist actions are being pursued, many are taking the form of measures permitted by the WTO, especially antidumping and (selective) safeguard actions. While such measures are discriminatory and clearly inconsistent with the letter (and spirit) of the G20 declaration, they are relatively transparent and subject to multilateral rules. Indeed, these instruments are often described as ‘safety valves’ that need to be included in trade agreements in order to give governments the assurance that in times of need – as is the case today – they will be able to re-impose a certain level of protection if this is needed for political purposes. While the use of trade policy is second-best, using WTO-legal mechanisms to manage pressures for protection is typically superior to recourse to nontariff barriers (such as VERs in 1980s). To date, the amount of imports targeted by these measures is small: less than half of one percent of the merchandise imports of G20 countries.

Another stylized fact emerging from the crisis responses is that where no multilateral disciplines exist, or where they are weak and limited in coverage, countries have been less able to resist protectionist pressures. The reintroduction of export subsidies by the EU and the US is an example. Nationalist solutions/bail-outs of financial intermediaries that distorted resource allocation decisions and competition is another. The lack of multilateral disciplines on policies affecting movement of workers providing services allows countries unilaterally redefine the rules of the game. (See the reports on these measures on http://www.globaltradealert.org.)2 The absence of disciplines on measures that affect service exports means countries are free to restrict outflows (e.g., of finance). WTO rules on public procurement have limited country coverage and may permit local (sub-national, municipal) governments to discriminate against foreign suppliers. Countries that have not signed the WTO Agreement on Government Procurement are free to pursue discriminatory policies.

Given that countries appear to be abiding by WTO commitments where these apply, a policy implication emerging from the crisis responses to date is that (re-)engagement in negotiations to establish multilateral disciplines in areas such as international financial sector regulation, government procurement, and services trade is needed. The resort to discriminatory state policies in these areas should help define the priorities for cooperation on commercial policy disciplines looking forward. The crisis has also revealed significant weaknesses in existing transparency and notification mechanisms, revealing the limited extent of information on discriminatory application of policies, whether or not subject to WTO rules.

Implications for international cooperation

Resisting the protectionist temptation is not a matter of luck or chance. Beyond declarations of good intent, four concrete steps toward reinforcing the global trade and financial architecture should be taken.

  1. Conclude the Doha Round.  The crisis has revealed that binding rules matter: WTO disciplines have played a positive role in constraining protectionism. This illustrates that the ongoing Doha round should not be assessed solely on the basis of how much new market access opportunities it generates – the metric used by many observers and some negotiators. Doing so is misconceived. The primary role of the WTO is to set the rules of the game and to lock-in the policies of members – the value of which is only revealed in times of crisis. As the crisis continues to impact on employment, the opportunity cost of inaction on Doha rises. Finishing the Doha round would limit the ability of governments to increase tariffs or agricultural subsidies in the future, send a strong signal of the international community’s commitment to keep trade and investment flowing and help countries resist pressures for protection when they begin to unwind their current expansionary policies. The value of “what’s on the table” has therefore increased as a result of the crisis – and will also rise in “real” market access terms as well insofar as countries raise applied trade barriers in response to the crisis.
  2. Fill key holes in the global trade/financial architecture. Initiatives  to address the cross-border spillover effects of policies that are not on the table in Doha. Getting to grips with many of these areas is conditional on finishing the Doha Round. This is not to argue that all of the policies that can give rise to cross-border spillovers should be addressed in the WTO. Specialized bodies will be more appropriate in some areas – e.g., international cooperation in the regulation of large banks. However, a number of policy areas fall within the ambit of the trading system, including public procurement, service-sector trade and investment, and the spillover effects of subsidy programs. The absence of international rules in these areas allows discrimination to be pursued with impunity. A very important area is climate change, where policy initiatives may have important the implications for the trading system.
  3. Invest in public goods to improve transparency. Recent monitoring initiatives – including the recent sophisticated WTO report – and related analysis have revealed that very little is known about the share of government purchases that are allocated to local firms or the magnitude and incidence of subsidies and other nontariff measures. In part this is a reflection of the absence of multilateral disciplines, and in part it is because WTO members are not living up to existing commitments to notify policies. But it is also because governments have not allocated the resources to collect comprehensive and timely data on policies and international transactions (e.g., trade flows in services; sales by foreign affiliates). Effective monitoring and analysis requires data. Such data has the characteristics of a public good and is under-provided. A concerted effort by governments to provide the relevant organizations – the International Trade Centre, UNCTAD and the WTO – with both the mandate and funding to complement tariff databases with sophisticated databases on NTMs, subsidies, procurement and services trade and investment would greatly improve transparency – a critical input into the defence against protectionism.
  4. Deliver on aid for trade commitments. The crisis is stimulating innovation by firms and creating new trade opportunities. Once the crisis ends, more open economies will be better placed to benefit from recovery in demand. From this perspective, it is particularly important that efforts continue to focus on enhancing the competitiveness of firms in developing countries by lowering trade and transport costs. Sustaining efforts to deliver on the commitments made at the 2005 Hong Kong WTO ministerial meeting to expand “aid for trade” should continue to be a priority, as this will help developing countries recover from a shock they had no hand in creating.

References

Evenett, Simon J., Bernard M. Hoekman and Olivier Cattaneo (2009). The Fateful Allure of Protectionism: Taking stock for the G8, a CEPR-World Bank e-book, July 2009.  

World Bank (2009). Global Development Finance, June, Washington DC.


1 The conference was financed in part by the Global Trade and Financial Architecture project, an initiative supported by the UK Department for International Development. The key findings of these papers were published as accessible executive summaries in a July 2009 CEPR-World Bank e-book, The Fateful Allure of Protectionism: Taking stock for the G8.

2 Global Trade Alert is a CEPR-led portal for online monitoring of trade-related measures taken during the current global economic downturn.

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Topics:  Global crisis

Tags:  trade, global crisis, protectionism

Professor of International Trade, University of St. Gallen; Research Fellow, CEPR

Professor and Director of Global Economics, Robert Schuman Centre for Advanced Studies, European University Institute; Research Fellow, CEPR

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