Thursday, October 18, 2012

South south trade, protectionism and generalizations

Argentina has been charged with being increasingly protectionist with its import licensing procedures by the EU, Japan and the U.S. While this could be dubbed as a developed world vs. emerging economy dispute, Mexico joined the group complaining against Argentina at the WTO with this complaint questioning the north-south divide stereotype. How Argentina reacts to the trade onslaught will need to be watched, especially when it has taken on the EU and Spain against Spain's biofuel directive.

A World Bank study had declared Argentina as the most protectionist emerging economy with a number of import restrictive measures. Is this a north south tussle or are emerging economies equally impacted by protectionist measures by developing economies. The mexican challenge is an example of a developing economy being impacted by Argentina's (another emerging economy's) measures.

Chad P. Brown has done a detailed econometric study on trade barriers and their impact on south south trade and protectionism. In his study titled "Emerging Economies and the Emergence of South-South Protectionism" he analyzes the long run cost to emerging economies of South South protectionism i.e what impact does trade restrictive measures (like antidumping, safeguards and countervailing duties) of an emerging economy have on another emerging economy that is engaged with it? The paper asks the important question:
"First, major emerging markets have increased the scope of their imports covered by TTBs. Second, major emerging countries have a sizeable share of their total exports and exports sent to other emerging economies impacted by foreign-imposed TTBs. An important question yet to be addressed is what happens to exports when these temporary trade barriers are finally removed? To what extent do exports resume?"
The study comes to the conclusion that, barring China, emerging economies export recover sluggishly even though trade barriers are removed subsequently by other emerging economies indicating the negative impact they have on south south trade:
" Not only do more emerging economy exporters have an economically sizeable share of their exports impacted by TTBs imposed by other emerging economies, but such barriers may have effects that long outlive the duration of the imposed barrier. For even once the temporary barriers are removed, emerging economy exporters experience greater relative difficulty in resuming their exports – whether measured in volumes or in market shares – to other emerging economy trading partners."
Protectionist trends are dictated by strong domestic compulsions, primary among them being protecting one's domestic industry. It is often viewed as a part of industrial policy and as an effective tool to engage with the competition and often "unfair" onslaught of the developed economies. However, this study show that protectionism is not always the developing vs. the developed world. Emerging economies are increasingly involved in trade and any such protections measure does have an impact on their respective economies. To what extent this would influence sovereign behavior is, however, debatable since protectionist measures are dictated by strong national business sentiment. 

There is also ambiguity as to what actually constitutes protectionism at times. Do legitimate domestic policy interventions also fall under this category? For example, antidumping and safeguard measures are permitted as per WTO rules provided they satisfy the conditions set forth therein. Merely because a country is imposing antidumping duties does not make it protectionist. Similarly, a number of countries do not impose blatant trade barriers but are engaged more systemic violation of trade rules like offering subsidies and state support that violate WTO rules. The word "protectionism" is a much abused term as much as countries actually abuse it. One needs to tread cautiously on this slippery path at the same time keeping in mind the dangers of an inward looking path.

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