Pascal Lamy on the "fallacy of protectionism"

I have often blogged about the growing signs of protectionism in recent times.While some are manifested in "buy local" measures others are in the form of increased "import licensing" measures. Though countries espouse less protectionism, the facts indicate that countries in times of crisis do tend to look inward to protect domestic industry, growth and interests.

Pascal Lamy in this post titled "The Fallacy of Protectionism" in YaleGlobal Online has highlighted the dangers of a protectionist world in the context of global realities of trade. Referring to the global supply chains and the active role WTO has played in monitoring international trade, protectionism though in existence, is not as pervasive as it could have been.

"The internationalisation of production that had so visibly bound economies together prior to the crisis was underpinned by the predictable trading environment provided by WTO rules. When the crisis broke, the WTO's combination of monitoring and surveillance and a firm framework of rules worked to deter knee-jerk protectionism.  Since January 2009, the WTO has issued regular reports on governments' use of trade restrictive measures. Together with the United Nations and the Organization for Economic Co-operation and Development, the WTO monitors how the Group of 20 leading economies comply with their pledges to refrain from trade and investment protectionism, documenting new policies to restrict or facilitate trade."

Will the reality of international supply chains, integrated markets and internationalization of production be the key to a less protectionist world? How much of global production is integrated? Pankaj Ghemawat tends to believe that we are less integrated than we think we actually are. Why are there clamours for "buy local" even from developed countries which are part of this integrated supply chain? Is there a difference between global corporations being part of integrated supply chains and countries representing vast majorities who are cut off from the realities of trade? Is there a disconnect between global supply chains and the vast majority of people who vote? Is democratic politics and the pressures of local, domestic interest different from value chain trade and internationalization of production? We need to critically look at this aspect if one has to find answers to some of the discomfiture with international trade and openness in many parts of the world. I am not suggesting that more protectionism is the answer. However, we need to understand what the reality actually is. It surely may be somewhere in between, as usual.

Is free trade a myth?

Do free trade and globalization have a positive impact on growth, wages and employment? Or do they adversely impact jobs, growth and local employment? I came across a blogpost in NYT's Economix that addressed this issue.

 The blogpost summarizes the views on the negative impact of globalization and free trade on wages and unemployment.

"For decades, economists resisted the conclusion that trade – for all of its many benefits — has also played a significant role in job loss and the stagnation of middle-class incomes in the United States. As recently as 2008, for instance, Robert Lawrence of Harvard, one of the country’s most respected trade experts, concluded that trade explained only a small share of growing income inequality and labor market displacement in the United States.

... 

One reason that economists may be uncomfortable talking about trade’s impact on jobs and wages may be concern that it could set off protectionist responses. And economists are right that expanded trade has certainly been good for the United States. It has brought us better and cheaper consumer goods, opened new export markets, lifted up many poor countries and strengthened American alliances around the world."

Citing studies that confirmed that growth in the U.S. was not taking place in sectors that were involved in trade, regions that faced competition from Chinese competition had higher unemployment and companies that were headquartered in the U.S. provided more jobs abroad than in the U.S. the post concludes that with growing markets in other countries trade should provide a boost to increasing opportunities and wages back in the U.S. A more critical analysis of free trade is found here which argues that the realities of trade in the renewable energy sector, especially solar, should necessitate protection in terms of increased State intervention.

Can we afford to ignore the principles of reduced barriers to trade in today's multilateral trade world? Though it may have a benefit, does it not have a huge cost too? What should the attitudes of countries be in the context of growing domestic pressures to increase trade barriers? While globalizing and reducing barriers may not be politically feasible, is it also economically unfeasible? 

Joseph Stiglitz proposes a "Right to Trade"

Joseph Stiglitz  recently spoke about a radical concept of the "Right to Trade" for developing countries that are impacted by the change in trade policies of the developed world.Calling for a change in the multilateral trading rules to incorporate such a concept, it essentially implies that the Right to Trade would be a tool in the hands of the developing world to take advantage of trade to work for the poor.UNCTAD reported it here.

The Commonwealth Secretariat summarized the concept here:

"As part of a pro-development multilateral liberalisation agenda, Prof Stiglitz said it is imperative to install alternative mechanisms to rebalance the global trading system and make trade work for the poor. He proposes that members of the WTO should adopt a general Right to Trade policy operating within the dispute settlement body. 

Under such a mechanism, developing countries would be able to bring an action against any developed country and access remedies. 

“A developing country (or countries) bringing successful actions under the Right to Trade could access a range of remedies, including elimination or change to the offending policy as a result of mediation, bilateral sanctions, and compensation from a multilateral Aid for Trade fund,” he said. 

“Under this arrangement, developing countries should be able to club together to impose joint sanctions where they have been affected by actions of policies of a developed country.”

The proposal works as follows:

"Under such a mechanism, developing countries would be able to bring an action against any advanced country where 3 conditions are met:       

 - a specific group of poor people within a developing country can be identified as being significantly and directly affected by a   specific trade or trade-related policy of an advanced country.        

 - the effect of the policy acts to materially impede the economic development of those poor people.    

    - the impediment operates by restricting the ability of the people to trade, or gain the benefits of trade." 

What implications does this have for the DSM of the WTO? It presupposes that developing countries need special rights under the multilateral system to ensure that trade is beneficial to it's people. It is definitely a radical thought considering that "national" treatment is the underlying philosophy of the WTO as well as the principle that the same rules apply to both the developing and developed worlds. What would constitute "developing" countries n this context? An emerging economy like China too fits this bill. How would the developed economies react to this proposal? He also stated that the Aid for Trade program of the WTO had not worked to the fullest extent possible and that a Global Trade Facility, a fund to be managed in the hands of UNCTAD must ensure that the developing countries are adequately compensated. Another example of the friction between the WTO and UNCTAD? I have written about the UNCTAD-WTO relationship here. Further, how would the proposed arrangement actually work? Would it be as a result of the dispute settlement decisions where developed countries measures are found to be restrictive? What about protectionist measures by developing countries? What about developing countries disputes inter se?

A strikingly out of the box proposal but as suggested by many delegates at the Commonwealth meeting - "the proposals were "radical", "progressive", "mischievous" and "interesting but risky". They added that more work needed to be done to tease out details of how these would work and be enforced."

Time for a radical change? With the Doha round in an impasse, it is difficult to visualize this radical agenda being accepted by the WTO members, by consensus.