Tuesday, June 12, 2012

Protectionism - A wave or a whimper?

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Is Protectionism on the rise again? I had blogged about the France Industries Minister's comments here. Argentina is facing a request for consultation against its import licensing requirements from EU about which I had blogged here. US and China are often locked in battles accusing each other of "protectionist" tendencies. News reports about India's ban on avian imports was a cause of concern for the US. Does the global recession lead to an increased sense of insecurity and hence a rise in measures that comprise of trade restricting measures leading to protectionist moves. Is it a temporary, cyclical or ever increasing phenomenon?

In a talk in Bangkok recently, Pascal Lamy, Director General of WTO warned against the rise in protectionism.
"Darker spots are, unfortunately, more numerous: a clear revival of protectionist rhetoric, statements in favour of import substitution policies, more or less transparent administrative measures, tax concessions, subsidies, domestic preferences in government procurement.
Protectionism is like cholesterol: the slow accumulation of trade restrictive measures since 2008 — now covering almost 3 per cent of world merchandise trade, and almost 4 per cent of G20 trade — can lead to the clogging of trade flows."
A recent joint study by OECD, WTO and UNCTAD for the G 20 on trade and investment restrictions reveals growing protectionism amongst countries. In a joint summary statement, the concern about different forms of restrictions was raised:
" The accumulation of trade restrictions is a matter of concern, which is aggravated by the relatively slow pace of rollback of existing measures.  This situation is clearly adding to the downside risks to the global economy.  Moreover, government support to selected sectors is distorting competition and restricting trade.  G-20 governments should resist any further deterioration in their collective trade policy stance and rely on open markets and the benefits of freer trade to help reboot growth in the world economy.  Increasing trade is critical to stimulating global recovery."
The Report itself was categorical in its concern for protectionist efforts. It stated:
"There is a revival of protectionist rhetoric in some countries …

The politics of trade in some countries seems to be turning inward-looking.  Of particular concern are statements by some G-20 Leaders in favour of import substitution policies as the pillar of economic growth in their countries.  This is generating regional and global trade tensions which have largely been absent since the coordinated policy responses to the global financial crisis were launched. 
Some G-20 governments are reportedly considering raising import barriers, or in some cases have already done so, to protect their domestic industries from what they may consider to be unfair competition.  In certain cases, the barriers seem to take the form of procedural or administrative actions to slow down the clearing of goods at borders rather than new laws or regulations.  This can render trade conditions even more difficult since lack of transparency about conditions of entry into a market increases uncertainty for traders and raises the risks and costs of doing business. 
There has also been a reported increase in restrictions placed on government procurement activities in some countries.  More open trade in government procurement allows governments to purchase goods and services based on who offers taxpayers the best deal, ultimately saving money.  The optimal action would be to convince trading partners to further open their public procurement markets rather than closing domestic markets. 
With tight government budgets, high unemployment, slower growth, and the prospects of further multilateral market opening seemingly slipping away, the threat of protectionist pressures looms even larger.
Implementation of new trade restrictions continues unabated …
Since mid-October 2011, 124 new trade restrictive measures have been recorded, affecting around 1.1% of G-20 merchandise imports, or 0.9% of world imports.    The main measures are trade remedy actions, tariff increases, import licences and customs controls.  There were fewer new export restrictions introduced over the past seven months than in previous periods.
The more recent wave of trade restrictions seems no longer to be aimed at combatting the temporary effects of the global crisis, but rather at trying to stimulate recovery through national industrial planning, which is an altogether longer-term affair.  In addition to trade restrictions, many of these plans envisage the granting of tax concessions and the use of government subsidies, as well as domestic preferences in government procurement and local content requirements.
Accumulation of trade restrictions has become a major concern …
The new measures restricting or potentially restricting trade that were implemented over the past seven months are adding to the trade restrictions put in place since the outbreak of the global crisis.  The accumulation of trade restrictions is now a matter of concern.  The 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 accumulation of trade restrictions is aggravated by the relatively slow pace of removal of existing measures.  Out of a total of 802 measures that can be considered as restricting or potentially restricting trade implemented since October 2008, 18% have been eliminated.  At the time of the last monitoring report in October 2011, around 19% of the restrictive measures had been removed, which means that the rate of removing restrictive measures is actually slowing down.
Moreover, the accumulation of restrictions has to be considered in a broader perspective where the stock of trade restrictions and distortions that existed before the global crisis struck, such as in agriculture, is still in place." 
The Report analyses in detail export restrictions, TBT measures, SPS measures, initiation of anti-dumping and countervailing measures, Government support measures amongst G 20 countries. The Joint summary concluded that more effort at multilateralism is required to ward of protectionist tendencies.

"We appeal to G-20 governments to redouble their efforts to strengthen multilateral cooperation to find global solutions to the current economic difficulties and risks, and to seek to avoid situations that would create trade tensions between them.  The multilateral trading and investment system needs to continue acting as an insurance policy against protectionism.  Stronger global cooperation is needed to rebuild a robust architecture for trade and investment in the 21st century.  The forthcoming G-20 Summit in Los Cabos should send a strong and clear signal about the need to keep markets open, resist protectionism, and preserve and strengthen the global trading and investment system so that it continues performing this vital function in the future.   A firm commitment to improve multilateral transparency and peer review should be pursued."
While what constitutes protectionism and what is an exercise of domestic policy space is debatable, the Report highlights the growing trend towards inward looking policies. Recently, the WTO Appellate Body ruled against the Dolphin Safe labelling measure of the United States as being violative of Article 2.1 of the TBT Agreement. Can the measure now be considered protectionist since it is less favourable to fish from Mexico? Would non-compliance of the WTO measure be an inward looking act? A letter written to the US President by some  US House of Representatives members in support of the labelling measure raises interesting questions of the limits of domestic policy and WTO obligations.
Protectionism is used generally in terms of measures initiated by countries that restrict trade. Some of them may be within the confines of the exceptions provided by the WTO Agreements itself. Some of the measures may be more trade restrictive than necessary while some of them may be justified as per the WTO rules. While determination of which measures fall within the ambit of the rules is a complex, legal exercise requiring a detailed appraisal of law and fact, the general tenor of the Report detailing out such measures signifying a "protectionist" move if not wave should not be missed.

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