The protectionist juggernaut threatening world trade

<p><em>Romesh Vaitilingam interviews Simon Evenett for Vox</em></p>
<p><em>Septmeber 2009</em></p>
<p><em>Transcription of an VoxEU audio interview [http://www.voxeu.org/index.php?q=node/4013</em></p>
<p><strong>Romesh Vailtingam</strong>: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vailtingam and today&rsquo;s interview is with Professor Simon Evenett from the University of St. Gallen in Switzerland. Simon and I met in Geneva at the &ldquo;Thinking Ahead on International Trade Conference&rdquo; in mid-September, 2009. We met just ahead of the G20 Summit in Pittsburgh and spoke about the latest report from Global Trade Alert, called &ldquo;<a target="_blank" href="http://www.globaltradealert.org/gta-analysis/broken-promises-g20-summit-... Promises</a>&rdquo;, all about the protectionist juggernaut threatening the world.</p>
<p><strong>Professor Simon Evenett</strong>: The Global Trade Alert team, which is made up of researchers across the world, is seeking to identify state measures which have knock on affects which are adverse for foreign interests. Really, we are looking for state measures which tilt the playing field away from foreign commercial interests, whether that be exporters, investors, migrants, or intellectual property deployed abroad. So unlike some exercises of monitoring, where people look for WTO legalities, is something reasonable, is it crisis related, we look for whether or not it tilts the playing field, that is the objective.</p>
<p>We have investigated 428 state measures and looked for whether or not we can document &ndash; and the key word is &ldquo;document&rdquo; &ndash; discrimination. Where we can we write it up and we explain why and we also provide the sources. And there are also many cases which we have investigated and we couldn&rsquo;t find any discrimination as well. We use a traffic light system to differentiate between the good and the bad, and the maybe bad. And we found that there is some traditional protectionism which is being employed &ndash; your classic tariff raises which are transparent instruments. But we have also found governments resorting to either measures which they haven&rsquo;t used so much in the past, like public procurement measures during crises, or to state aids, which are a relatively new phenomenon. And where there is a lot of potential for selectivity and for governments using their discretion in order to favour domestic firms.</p>
<p>That latter type of protection is often called &ldquo;murky protectionism&rdquo;. And I think it is fair to say that we have seen some of the original protectionism, the traditional type, and murky protectionism during this crisis.</p>
<p><strong>Romesh</strong>: You have just published the second Global Trade Alert report and you describe what is happening as a &ldquo;protectionist juggernaut&rdquo;. Can you explain what you mean by that and what is exactly happening?</p>
<p><strong>Simon</strong>: We estimate that of the 428 cases that we have investigated about just under 300 are being implemented. And of them 192 have beggar-thy-neighbor features. Month by month, or quarter by quarter, let&rsquo;s say quarter by quarter, there are about 70 cases which are protectionist cases which are being implemented. And these are wide ranging, some have narrow impacts, others go across many countries and many products or many sectors. So we found this dynamic is not abating, it is not slowing down. If people think that this protectionist dynamic is coming under control, if that means a slowdown in the number of measures, then that is not happening. We think the juggernaut is maintaining its speed.</p>
<p>Worse, we have identified 134 state measures, which, if they are implemented, are likely to be protectionist. So these are ones that are in the pipeline; they have been announced but not yet implemented. It turns out that this pipeline protectionism is worth about half a year of actual protectionism.</p>
<p>We have had since November of last year about 192 protectionist measures put in place, and we have another half a year&rsquo;s worth of protection which is just working its way through the system. So we think the juggernaut is going to roll on for quite some time.</p>
<p><strong>Romesh</strong>: You called the new report, Broken Promises, by which you mean the repeated promise made by leaders of the G20 countries to have no new protectionism. Can you explain which of those G20 countries are the guilty parties? Which ones are breaking the promises, and then, which ones are feeling the pain, who is being hit the worse, and which sectors are being hit?</p>
<p><strong>Simon</strong>: The way that the Global Trade Alert works is for each measure that we investigate we don&rsquo;t just say whether or not it is discriminatory or not, we also look to see how many product lines are likely to be affected by it - that is often how much trade is affected by it - how many economic sectors are affected; and how many trading partners are affected. So that means that we can measure harm in four ways: number of protectionist cases, number of product lines affected, sectors affected and countries affected. We have put together rankings of the top ten worst offenders on these four dimensions.</p>
<p>It turns out there are 18 countries in those top ten lists, the hall of shame maybe. And of those 18, 12 are G20 members. Those 12 countries are Russia, Germany, India, Indonesia, Italy, UK, China, Argentina, Japan, US, Mexico and France.</p>
<p>The country which stands out, which is always in the top five of those rankings, or four, is Indonesia, which is a country which is very conflicted, it seems, on its trade policy response. China and India are always in the top ten in all four criteria, and in three of the four criteria China and Russia are always in the top ten of the ten worst offending countries. And Germany and India are in for three of the four indicators. So what you can see is that at least five of the G20 members are serial offenders here. And there are a lot of others who aren&rsquo;t exactly acting like angels either.</p>
<p>Now when it comes to sectors which were affected, this was a very interesting finding. We thought, with all the talk about supporting green growth, innovation and alike, that we would see a lot of protection and favouritism towards sectors which are sort of more advanced in high tech. But in fact it turns out that the bulk of the sectors where protection is being imposed are the old traditional sectors of agriculture, textiles and apparel, and low productivity manufacturing &ndash; like smokestack manufacturing.</p>
<p>So that makes you wonder, are corporate interests taking advantage of this particular opportunity, the crisis, to reinforce their protection? And how much do we really believe that the state intervention is actually being directed towards restoring economic growth?</p>
<p>It is probably the case that some of it is going towards the latter, but more of it is probably going towards existing recipients of protectionism then we probably thought before.</p>
<p><strong>Romesh</strong>: How do your findings reflect on the global body monitoring world trade, the World Trade Organization, and how do they reflect on the European Union, which is supposedly all about a single market?</p>
<p><strong>Simon</strong>: The WTO has had an increasingly elaborate monitoring exercise, and it has got richer and richer in qualitative detail. And there is a real difference in approach between the GTA approach and the WTO approach: which is that they are quite reluctant to count, whereas we are. Meaning that we will enumerate, we will try and summarize intelligently the contours of protectionism, whereas, for good reasons, the WTO is a bit more reluctant. They have a different role to play and their report plays a different role.<br />
But I think people will look at these two reports and think, &ldquo;Wow, they are very different&rdquo; and hopefully be informed by both of them.</p>
<p>Now the EU has its own monitoring report as well, but more interesting, as your question pointed out, we are supposed to have this common market in the EU with very strict rules. But that is very hard to square with the huge number of distortionary state aids that we found, or subsidies which have been implemented. The last time I checked there were 619 of these applications for state aids under what is called the temporary framework for state aid within the EU. And what we have left as information about those applications, the Commission writes a letter to the Member States.</p>
<p>And normally they turn around and say, &ldquo;Your state aid does distort the single market but we are going to let you off doing this using a loophole and an exception for the duration of the crisis, or for some fixed period of time.&rdquo; And so what this really raises is the question just how much is the single market being distorted during this crisis? And to what extent is Europe really a free trading zone anymore? And whether or not much of the progress towards European integration of borders and markets has actually been unwound in the last two years. I think that is a particularly European problem, which they are going to have to face, and I think much of it turns on this state aid regime.</p>
<p><strong>Romesh</strong>: Simon, we are talking on the eve of the Pittsburgh Summit of the G20, what advice would you give to the policy-makers there? Do they first have to apologize for breaking their promise?</p>
<p><strong>Simon</strong>: Maybe some contrition would be nice, but that&rsquo;s not what&rsquo;s going to happen. I think trade has been demoted before the G20 Summit and it needs to be restored to its central place on the agenda. I also think that as far as trade is there at the moment, they are going to make a recommendation that the Doha Round be completed in 20ten. Rather than talk about the completion of a negotiation at some point in the distant future why not do things to deal with this protectionist juggernaut which is taking place now. And I would say two things in this respect.</p>
<p>First, this pipeline of measures which you talked about earlier, they should try and drain that and refill it. In other words countries should systematically review just how much they need to impose these measures which are anticipated to hit the world economy.</p>
<p>The second thing they should do is look at the measures they have put in place since the first G20 Summit on the crisis, which was last November. They have got to go back and look at that. A lot of those measures were put in place in an awful hurry, perhaps not with the most thought. And now is the time to go back, and every six months, see just are these measures still needed? Are the measures which have been chosen actually likely to meet the objectives which the government has stated? Is there another measure which could do the same thing but hurt trading partners less? And if there is there should be some type of substitution.</p>
<p>Ultimately, over time, you should encourage the unwinding and the substitution away from more trade distortive measures to less trade distortive measures. And this could be a process which goes forward, I think it would a very evidence-driven process whereby governments could review, more systematically, in a slightly less hot-headed atmosphere, the types of intervention in which they want to take forward.</p>
<p><strong>Romesh</strong>: How optimistic are you about some good news coming out of this?</p>
<p><strong>Simon</strong>: I think the key determinant here is how quickly the world economy recovers. If it recovers for non-export related reasons, the stronger is the non export related impetus, then I think the unemployment increases will be less, the pressure on governments will be less and we might end up with a situation, which, a few years from now, looks bad but was nowhere near the 1930s. I do think things have got to get really a lot worse before we are going anywhere near the 1930s. I hope that is the case, although the recent frictions between China and the United States are a source of serious concern.</p>
<p>But I think much depends on how politicians respond to the growing unemployment, the growing bankruptcies, which we will see over the next six to 12 months. That is the key thing I am following.</p>
<p><strong>Romesh</strong>: Final question Simon, I wonder if you could reflect on the contribution of economic research makes to discussing these crucial issues for world trade?</p>
<p><strong>Simon</strong>: I think economic research is often pursued by academics looking for what is the latest high tech technique I can use to try and show the effect of this or that. But sometimes some of the most useful economic research is about enumerating what has happened. About getting the factual record right and on the table and done in a way where people can intelligently compare and contrast what is going on to get their picture of whatever is the policy question. Now here the policy question is to what extent are governments resorting to protectionism? And I think economic research and economists in general can add a lot to the understanding of what has actually happened and why it is happening.</p>
<p>Because governments who are indulging in this, don&rsquo;t want to have a discussion on this issue, they clearly don&rsquo;t want to discuss this that often. And I think we need to overcome that information barrier and independent researchers who have the resources and the time can really make a contribution here.</p>
<p>Another thing we need to realize in economic research in this area is that the political decision cycle is really quite short. And in crises things move really quickly. Banks have fallen over weekends, and the fate of banks is decided over weekends. That is what we saw last year.</p>
<p>So what we have to recognize is we have to get high quality information into the public debate. And that may mean that we might not be able to do the sort of high tech sophisticated analysis of effects of every single measure which is out there. Instead we may end up having to inform the debate by the use of sophisticated facts and the summarizing of it.</p>
<p>And indeed I think it would be a real mistake to turn around and say, &ldquo;Oh, we can&rsquo;t possibly understand current protectionism until we have done economic analysis of all of the 400 or so measures that we have investigated.&rdquo; I think that waiting the five or ten years, or ten0 years that that would take would clearly miss the relevant political cycle.</p>
<p>So I think we need to remember that our academic instincts&hellip;we shouldn&rsquo;t make the perfect the enemy of the very good, and the very good often amounts to high quality information delivered on time, at the right time in a way the policy-makers and decision-makers find useful.</p>
<p><strong>Romesh</strong>: Simon Evenett, thank you very much.</p>