Trade protection: Incipient but worrisome trends

Richard Newfarmer, Elisa Gamberoni 04 March 2009

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With the global economy teetering on the abyss of severe recession, political pressures demanding import protection to protect employment are surfacing with increasing intensity around the world. However, if there is one lesson from the experience of the 1930s, it is that raising trade barriers merely compounds recessionary forces – and risks pushing the economy into prolonged contraction.

For this reason, G20 leaders signed a pledge on 15 November 2008, to avoid protectionist measures. However, since then, several countries, including 17 of the G20, have implemented 47 measures whose effect is to restrict trade at the expense of other countries. While the trend is of concern, to date, these measures have probably had only marginal effects on trade. The sharp contractions in trade volumes evident in recent months are a consequence of the global recession and financial feedbacks through skyrocketing costs of a shrunken pool of trade finance, not protection. Nonetheless, the trend in protection is up and the full effects of the recession have not yet been felt, raising concern.

Several countries have adopted new protectionist measures

Since the beginning of the financial crisis, officials have proposed and/or implemented roughly 78 trade measures, according to the World Bank’s monitoring list of trade and trade-related measures.1 Of these, 66 involved trade restrictions, and 47 trade-restricting measures eventually took effect (Figure 1). The trade effects of these measures are difficult to evaluate due to the prevalence of non-tariff barriers, subsidies and contingent protection – a task that nevertheless remains to be done. Nonetheless, the effects of these measures so far are probably minor relative to size of unaffected markets, but of considerable importance for particular exporters shut out of protected markets.

Figure 1. Numerous trade restrictions

Source: World Bank staff, List of Trade-related Measures, February 2009. Excludes anti-dumping cases.

Tariff increases comprise only about half of these actions (Figure 2). For example, Russia raised tariffs on used automobiles, and Ecuador raised tariffs on more than 900 items. Non-tariff measures include Argentina’s imposition of non-automatic licensing requirements on auto parts, textiles, TVs, toys, shoes, and leather goods and Indonesia’s requirement that five categories of goods (including garments, footwear, toys, electronics, food and beverages) would be permitted through only five ports and airports. In some countries, tightening standards have slowed import entry. For example, India banned Chinese toys, and China banned imports of n Irish pork and rejected some Belgian chocolate, Italian brandy, British sauce, Dutch eggs and Spanish dairy products.

Figure 2. Rich countries use subsidies, poor countries use duties

Source: World Bank staff, List of Trade-related Measures, February 2009. Excludes anti-dumping cases.

Export subsidies are particularly egregious because they contravene the draft Doha modalities. The EU announced new export subsidies on butter, cheese, and milk powder. Less obviously, both China and India have increased the rebate on the duty drawback system for exporters, and, although the subsidy component is a matter of discussion, the timing of these measures raises questions.

Subsidies proposed for the auto industry have proliferated and total some $48 billion worldwide, mostly in high-income countries ($42.7 billion). In addition to the US direct subsidy of $17.4 billion to its three national companies, Canada, France, Germany, the UK, China, Argentina, Brazil, Sweden and Italy have also provided direct or indirect subsidies – not including Australia’s support to its car dealers and South Korea’s and Portugal’s support to their component suppliers. To the extent that the industry is laden with excess capacity, these subsidies impede exit and delay adjustment. Even worse, subsidies may be linked to requirements that companies preserve domestic employment, even at the cost of shutting more efficient plants abroad in developing countries. (President Sarkozy reportedly proposed that Renault and Peugeot-Citroen shut plants in the Czech Republic to maintain employment in France as part of its €6 billion package.) Moreover, to prevent this, governments have had to react to the policies of neighbours –Canada has matched the subsidies given to Detroit automakers to ensure that Canadian plants of American producers remain open.

A remarkable trend emerging from these actions is the reliance of developed countries on subsidies rather than border barriers, while developing countries have deployed all forms of protection (Figure 2). This undoubtedly is testimony to the superior financial strength of public budgets in developed countries. However, once economic pressures to stimulate economies are replaced with the inevitable need to reduce deficits, this pattern may portend equally severe pressures to wall off trade competition.

Antidumping cases are on the rise

.After a period of slowdown, the number of antidumping cases (both investigations initiated and imposition of duties) surged in 2008, especially in the second semester (Figures 3 and 4). Compared to 2007, antidumping initiations grew by 15% and findings with imposition of duties grew by 22%. Developing countries accounted for the majority of initiations, though developed countries accounted for the greatest number of duty impositions. India was the most active, accounting for 29% of total initiations. In December alone, India initiated anti-dumping investigations involving both hot- and cold- rolled stainless steel products, affecting 19 countries. In addition to Japan, three developing countries -- China, South Africa, and Thailand – were the target in both investigations. The US and EU were the two countries that most frequently imposed duties. For example, the EU in December 2008 imposed duties on preserved fruits from China as well as on imports of welded tubes and pipes of iron or non-alloy steel from Belarus, China and Russia.

Figure 3. Antidumping cases are up…

Source: Chad Bown, Global Anti-Dumping Database, World Bank forthcoming.

Figure 4. … and growing rapidly

Source: WTO, Anti-dumping Database and Chad Bown, Global Antidumping Database, World Bank forthcoming.

Trends in agriculture, finance and labour movement warrant monitoring

Protection to agriculture may not require new measures because existing laws automatically provide increases in subsidies with declines in agricultural prices. Many programmes – such as those of the EU, US, Japan, South Korea, to name a few – entail price supports, so when commodity prices fall, direct payments to producers increase. For example, we estimate that US overall trade distorting subsidies of about $8.1 billion in 2008 are likely to rise to $9.9 billion 2009 if current price projections materialise.2 Trade-distorting subsidies push the global burden of adjustment onto commodity producers in Africa, Asia, and Latin America, where governments do not have resources to match subsidies of the wealthier countries.

These measures also ignore the protectionist bias in the financial sector. While serving the urgent public purpose of re-establishing financial stability, virtually all nations have focused their financial subsidies on domestically owned banks rather than subsidiaries of foreign banks (perhaps a consequence of relative size more than national protection).
Workers in some countries have campaigned for increased restrictions on foreign labour. In the UK, for example, the dispute over the use of Portuguese and Italian contractors in oil refining at a time of surging unemployment led workers to strike in protest at the end of January and triggered several sympathy protests across Britain. Workers complained that foreign companies were overlooking skilled British workers. Malaysia in January banned the hiring of foreign workers in factories, stores, and restaurants to protect its citizens from mass unemployment amid the global economic downturn. To their credit, the Swiss voted in a referendum in early February to accept EU labour rules, including foreign labour from newly acceded countries.

Buy America generates a storm

In late January, the US House of Representatives passed a stimulus bill that would provide a 25% competitive margin for US iron and steel for all expenditures under the bill. Several governments, including those of Canada and the EU, and well-known economists3 objected forcefully to the provisions (Hufbauer and Schott 2009). The final version, which passed last week, expanded the coverage of the provision to all manufactured goods but added a stipulation that the provision “be applied in a manner consistent with US obligations under international agreements” (Sec. 1604 (d)). This apparently exempts the 27 EU member states and the 12 other countries that have signed the WTO Agreement on Government Procurement and the countries with Free Trade Agreements.4 These countries collectively supply about 25% of US iron and steel imports. According to USTR and private lawyers, this seemingly small change puts the new stimulus legislation into conformity with existing legislation and would imply no new restriction on federal purchases.5 It would still mean that government purchases of iron, steel and other manufactures from China, India, and Russia, among others, would be subject to the provisions.

…but trade integration and stronger rules have thus far muted protectionism

Several factors have clearly muted protectionist pressures and distinguish this global downturn from the pressures of the 1930s. Countries are far more interdependent through supply chains, imported inputs, and even services, and so export interests are far more powerful than before relative to pure import-competing industries. The simple average of trade-to-GDP today is 96% compared to 55% in 1970 – and parts and components trade, an indicator of supply chains, has more than doubled as a proportion of total trade. Successive GATT/WTO agreements have provided much greater legal stability of trading relations.

Because of this quite different political economy today, a few proposed restrictions have been rejected or not enacted. In Brazil, for example, the bureaucracy attempted to impose widespread licensing arrangements and import controls reminiscent of the 1970s, only to provoke a response of outrage from the private sector that led to immediate reversal. Similarly, the more egregious forms of the Buy America provision appear to have been circumvented. Moreover, about 10 of the 77 proposed and implemented changes in trade policies involved steps toward greater liberalisation, mostly related to free trade agreements.

Also, most countries have flexible exchange rates, and, as capital has sought safety in US Treasuries, nominal exchange rates against the US dollar have plummeted. This shift in relative prices domestically has given import-competing interests considerable protection. The floating rate regimes have arguably pre-empted a wave of competitive devaluations that disrupted markets in the 1930s. For the handful of countries intervening in exchange rate markets, it generally has been to prevent further depreciations – such as Argentina and Russia. China has apparently ceased accumulating reserves since October, and the nominal rate has stabilised after a two-year 20% appreciation.

Forceful leadership can help

The cost of inaction on the Doha Agenda is rising. While thus far most countries have not raised tariffs to bound levels or taken full advantage of headroom on agricultural subsidies, as the recession deepens, many countries may well do so. By the recession’s end, it is a safe bet that the lower bindings and caps on agricultural subsidies contained in the draft texts would have kept many markets open that will be closed by the end of 2009. This underscores the importance of pushing forward with a rapid conclusion of the Doha round.
The recent decision by the WTO membership on 9 February 2009, in the Trade Policy Review Body will, in the meantime, contribute to regular multilateral surveillance of the world trading system (WTO 2009).

The G20, for its part, could adopt additional measures that would strengthen the fragile consensus against further protectionism. It could, for example:

  • Commit to greater transparency by agreeing to provide quarterly reports on new trade restrictions and industrial and agricultural subsidies to the WTO, together with a mandatory analysis of the trade restriction on employment (since this would create new room for technical analysis and political discussion within member countries).
  • Agree to promote use of standard safeguard provisions in lieu of antidumping laws.
  • Agree to accelerate progress on technical issues still separating negotiators on the Doha round, including producing new working texts on the special safeguards mechanism, sectoral negotiations, and cotton.
  • Advocate greater Aid for Trade for low-income countries.
  • And decide to endorse voluntary implementation of the trade facilitation provisions, not as an “early harvest”, but in a non-binding fashion linked to overall trade facilitation reforms design to lower trading costs.

Disclaimer: The views in this column are those of the authors and do not necessarily represent those of the World Bank or its Executive Directors.

References

Hufbauer and Schott “Buy American: Bad for Jobs, Worse for Reputation” Policy Brief Washington: Peterson Institution for International Economics February 2009.
WTO Staff, “Report to the TPRB from the Director-General on the Financial and Economic Crisis and Trade-Related Developments” February 9, 2009


1 The World Bank’s Trade Department (PRMTR) maintains a list of proposed, enacted and/or rejected trade measures taken from news accounts, official reports, and other sources; virtually all measures are taken from two sources and where possible receive confirmation with country staff; nonetheless, numbers here are subject to a small margin of error as government policies at times are opaque and subject to change, even reversal. This list does not include “automatic” increases in agricultural protection, contingent protection (antidumping), WTO-sanctioned measures to compensate for panel findings against trading partners and financial sector subsidies (discussed in subsequent sections). More important, this discussion does not attempt to quantify the trade effect of any particular event and thereby attach some weight to each action – though obviously some actions have far greater impact in closing markets than others.
2 This is based on the methodology of Will Martin and David LaBorde.
3 These have included economists of diverse persuasion, such as Gary Hufbauer and Jeff Schott, Douglas Irwin, Glen Hubbard, and Joseph Stiglitz, among others.
4 Most US FTAs have provisions similar to Art. 9.2(1) (General Principles--National Treatment and Non-Discrimination) of the US- Chile FTA, which provides that: "With respect to any measure governing procurement covered by this Chapter, each Party shall accord to the goods and services of the other Party, and to the suppliers of such goods and services of the other Party, treatment no less favoruable than the most favorable treatment the Party accords to its own goods, services and suppliers." The original version of the US bill would have violated this provision.
5 Hufbauer contends that one legal interpretation could asserted some new restrictions, if minor, for those states that have not acceded to NAFTA; this could be clarified at signing if necessary.

 

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Topics:  International trade

Tags:  tariffs, non-tariff barriers, subsidies, protectionism, anti-dumping

Elisa Gamberoni

Policy Officer at the World Bank

World Bank’s Special Representative to the United Nations and World Trade Organization