Tuesday, December 20, 2011

Has WTO protected enough against "protectionism" ?

In the recent Ministerial Conference of the WTO,  member after member spoke about the importance of not following a path of "protectionism".

Here are some of the excerpts:
European Union
" Protectionism continues to be a significant threat for the world economy. The WTO as an organisation has contributed to keeping markets broadly open through its valuable transparency and monitoring functions. But we are now witnessing a second wave of protectionism, which entails more sophisticated but not less damaging measures. WTO members therefore need to do more. We all must keep our markets open and resist trade restrictive measures, whether they are WTO compatible or not, both through domestic policy choices and the tasks and instruments we give to the WTO to exercise its legitimate oversight role. The EU has made proposals for reinforcing the monitoring function of the Trade Policy Review Body, and for ensuring that members respect their transparency and notification obligations. Transparency is not an area where Special and Differential Treatment for developing countries can be justified.  It is also imperative to roll back trade restrictive measures taken since the crisis broke out."

IV. Resisting protectionism
We have to remain on guard in our efforts to fight protectionism. In this connection, the WTO’s monitoring process is a key instrument that needs to be strengthened even further."

We have been concerned by the fragile nature of recovery and the prevailing uncertainty especially in the Euro Zone.  We have a peculiar situation where the harbingers of free trade have themselves started looking inwards. In the challenging backdrop of global economic downturn, all countries must eschew protectionism which can only be counterproductive as it will deepen the recession and delay recovery. The need of the hour is enhanced economic engagement and free flow of trade."

The global economic crisis, described as “once in a century”, seemed to have settled down at one point. The current situation, however, does not allow for such an optimistic outlook. With rising concerns about countries becoming inward looking and diminishing interest in trade liberalization, we are precisely now at a time when all the WTO members should jointly embrace the value of free trade, which helps realize growth, job creation and the development in the developing members."

" At the same time, while we are we are seeking to liberalise trade, we must resist protectionism in all its forms."

Surprisingly the United States note does not categorically come out against "protectionism".

A recent discussion paper titled "Did WTO Rules Restrain Protectionism During The Recent Systemic Crisis?" by Simon J Evenett raises the issue whether the WTO really brings down "protectionist measures" during economic crises. The paper is critical of the impact the WTO has on combating domestic policy measures that have an impact on free trade. It is also severely critical of the Dispute Settlement mechanism that many have hailed as one of the strongest features of the multilateral system.

The paper concludes, based on findings,

"Since its creation analysts broadly sympathetic to the benefits of an open world trading system have lauded the World Trade Organization. This adulation has gone too far, or at least too far for the factual record and for logic to bear. The recent global economic crisis affords an excellent opportunity to revisit the effectiveness of the WTO, examining how much it really affects behaviour when member governments are under tremendous pressure to restore health to national economies. It should be understood, however, that the contribution of the WTO to an open trading system may differ between systemic economic crises and less  strained economic circumstances, and only the former was examined here.

During the recent global economic  crisis much has been made  of the fact that governments have not resorted to Smoot Hawley-like tariff increases that were condemned after the Great Depression. Contemporary analysts of protectionism have thus been lectured on the lessons of history, notably by those wanting to credit the WTO. Unfortunately, the Smoot Hawley tariff argument cuts both ways and is not the only important historical point of reference. At least two others are relevant. First, during  dire economic circumstances  governments create new forms of protectionism, that circumvent existing multilateral trade rules and are not picked up by monitoring exercises whose scope are typically circumscribed by prevailing trade rules. In any systemic crisis sticking rigidly to inherited notions of protectionism will almost certainly create a misleading, incomplete understanding of contemporary protectionism. 

The second historical lesson of relevance is that when a policy choice (such as being on the Gold Standard) becomes the ultimate constraint preventing desperate policymakers from taking certain actions thought to provide sizeable relief, then the odds are that the constraint gets overthrown. What this means for the WTO is that those who view binding multilateral trade rules as the best way to prevent discrimination against foreign commercial interests had better  ensure that every redesign  of those rules  allows for  non-discriminatory means  to be available  to tackle  each future systemic crisis. Moreover, since the nature of the latter are unknown and potentially unknowable, one might question whether such redesigns are possible and, therefore,  the wisdom of relentlessly pursuing  ever more multilateral trade disciplines. Practical considerations in times of extremis  overturn  the tidy visions of  an ever-expanding architecture of legally binding commercial rules. Rather than banning every form of discrimination perhaps revisions to multilateral trade rules should channel discrimination into less harmful and shorter-lived forms. 

To the extent that governments have shown restraint towards protectionism during the recent global economic crisis it is difficult to  give much  credit  to  the  existing multilateral  trading obligations for the reasons presented above. So weak and easy to evade are those obligations that other factors had to been more important. Noting in addition the regrettable breakdown of the Doha Round negotiations,  it is just as well that  the  medium term  health of  the  world trading system does not  rely solely on multilateral trade rules and the international organisation established to  administer them. The ultimate conclusion of this paper  is that in times of systemic economic crisis the prevailing patchwork of multilateral trading obligations is much weaker than many realise. Expectations need to be realigned accordingly."

The paper argues that "protectionism" can take place in many areas of trade policy wherein WTO rules are non-existent or weak. Further, the effectiveness of the Dispute Settlement mechanism to act as a deterrent has also been questioned due to the "loopholes" of the Dispute settlement mechanism.

Does protectionism also include the steps taken by a member country to protect its domestic interests "within" WTO rules? Protectionist measures occurs when foreign commercial interests are adversely affected by a measure of a Government. Does it encompass measures not covered by WTO agreements as well as breaches of WTO obligations? Does it also include measures consistent with WTO agreements but inward looking in nature? When countries "utilise" WTO rules to further domestic interests is it ipso facto protectionism?

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