Tuesday, June 19, 2012

Is Protectionism rising?

The fears of rising protectionism (of rising barriers, both tariff and non-tariff barriers) loom large across the world. The failure of the Doha Development Agenda has created an impasse to further liberalise trade rules. The trend of a drift towards protectionism is often reported. This is despite public commitments of opening up of trade and resisting protectionism. The 8th Ministerial Conference of the WTO had unequivocally advocated the commitment to multilateral rules in its statement of political guidance:
"1. Ministers emphasize the value of the rules-based multilateral trading system and agree to strengthen it and make it more responsive to the needs of Members, especially in the current challenging global economic environment, in order to stimulate economic growth, employment and development.
2. Ministers underscore that the WTO’s role in keeping markets open is particularly critical in light of the challenging global economic environment. The WTO has a vital role to play in the fight against all forms of protectionism and in promoting economic growth and development. Ministers also acknowledge that experience has shown that protectionism tends to deepen global economic downturns. Ministers fully recognize WTO rights and obligations of Members and affirm their commitment to firmly resist protectionism in all its forms."
Perhaps statements of political guidance often do not translate into sovereign, national actions of countries across the developmental divide. Moreover, countries often justify their measures as being consistent with multilateral obligations and not being protectionist in letter and spirit.

Pascal Lamy, Director General of WTO recently addressed this issue:
"For the first time since the beginning of the crisis in 2008, this report is alarming.  The implementation of new measures restricting or potentially restricting trade has remained unabated over the past seven months, which is aggravated by the slow pace of rollback of existing measures. 
The accumulation of these trade restrictions is now a matter of serious concern.  Trade coverage of the restrictive measures put in place since October 2008, excluding those that were terminated, is estimated to be almost 3% of world merchandise trade, and almost 4% of G-20 trade. The discrepancy between the commitments taken and the actions on the ground add to credibility concerns.
This situation is adding to the downside risks to the global economy and what is now a volatile global context.
In such a situation, it is important that we collectively and urgently redouble our efforts to strengthen multilateral co-operation to find global solutions to the current economic difficulties and risks and avoid situations that would cause further trade and investment tensions."
What ultimately causes countries to adopt protectionist measures? Does an economic depression or the need to protect a local industry fuel it? Do democratic, political compulsions promote it? Do domestic business interests play a dominant role in policy making to ensure that barriers are raised? Is it politically more expedient to justify a protectionist measure to one's constituency? Does it signify a nation's control over it's own sovereign destiny? Is it a reaffirmation of one's national sovereignty? Are the reasons economic, political or both?

A study titled "Protectionism isn't countercyclical (anymore)" by Andrew K Rose in Vox analyses the relationship between economic depression, unemployment, growth and protectionism in terms of tariff barriers. He comes to the conclusion that protectionism is anything but cyclical - that is a wave of depression does not necessarily lead to the rise in protectionist measures.
"The goal of my recent work has been to show that, at least since World War II, protectionism has not been countercyclic. While this runs counter to conventional wisdom, the evidence is reasonably strong; no obvious measure of protectionism seems to be consistently or strongly countercyclic."
Taking the example of initiation of disputes at the WTO as a sign of protectionist measures, he has analysed the disputes initiated with growth patterns.
"Accordingly, Figure 3 provides a time-series plot of annual global GDP growth and the number of commercial disputes initiated under the GATT/WTO dispute settlement system. This is by no means a perfect measure of protectionism. Complaints are not formally initiated against all protectionism, are not equally important, and are not randomly initiated across countries. The inadequacies of the GATT system led to considerable reform under the WTO in 1995. Still, this measure covers both the world and NTBs.1 The message from Figure 3 is that, for the world as a whole, global growth is essentially uncorrelated with the initiation of disputes under the multilateral mechanism set up precisely to handle protectionism.

This paper is an interesting economic analysis of protectionism. However, as the author himself indicates, all disputes initiated at the WTO may not signify issues of protectionism. May be a better analysis would be to plot the disputes in which the Appellate Body declared a measure contrary to WTO rules instead of the initiation per se. Another issue is of what constitutes protectionism? Is raising tariffs, even if it is within the bound rates of a country, per se a protectionist measure? Certain measures that raise the barriers of free trade are permitted by the WTO rules. Do they constitute protectionism? Is there a difference between economic protectionism and legal protectionism whereby the former is a much broader concept than the latter? In other words, a measure may be protectionist in the economic sense of restricting competition and not taking advantage of optimum allocation of resources but might be perfectly legal as per international trade law since the exceptions in the WTO rules allow for such a legitimate use of policy space. When we speak of protectionism rising, what form of protectionism are we talking about? Further, a whole host of non tariff barriers like technical barriers and standards are in play now denoting new forms and classes of protectionism. Is protectionism a relative term?

No comments: