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.

Negotiating positions and domestic interests

This blogpost from globalisationanddevelopment highlights the dilemma of a negotiating position during multilateral trade negotiations. Though I have never been part of any such negotiations, I found these remarks interesting:

"In fact, a major problem in trade negotiations in the WTO has been the contradiction between the free trade theoretical approach of the organisation, which views trade negotiations as a positive-sum game; and the mercantilist ethos of the country negotiators, who effectively define the negotiations as a zero-sum game.  This, of course, makes a successful outcome difficult, and, in some cases (e.g. agriculture), impossible, at least so far.

The fundamental cause of the mercantilist stance of negotiators lies, of course, in the national political economy of the negotiations.  Governments stand to lose revenue when they reduce tariffs; national industries stand to lose domestic market shares when they face competition from imports.  The training of negotiators compounds the problem."

The author seems to provide this as a solution:

" For one thing, the training of negotiators –both from developing and developed countries- and more generally the public discourse of the WTO and the international trade community should strike a balance between emphasising the win-win possibilities of trade and recognising frankly its distributional consequences.

For another, and more importantly, the international community as a whole should address the distributional issue seriously through mechanisms to compensate the countries that would experience welfare loses; this can be done by means of direct transfers as well as policy changes elsewhere that raise the welfare of the affected countries."

Is this easier said than done? All countries at negotiations take "national", "mercantilist" positions. They, I presume, bargain for the best deal for their country and considerations of international competition and benefit to consumers is not on the agenda. They look to benefit domestic producers by protecting them from competition as well as seeking increased market access outside. Therefore, the general free trade theory of benefitting from the comparative advantage the world economy has to offer is not on top of the agenda of trade negotiations. Can this attitude be achieved in trade policy negotiators? Are domestic pressures too strong to allow such an attitudinal change? It would amount to consciously sacrificing domestic producer interests which may not be domestically, politically palatable. Is this also the reason why protectionism in varying forms continuously surface? A well thought out strategy for compensating the losers of globalisation (which is felt locally) would be required if free trade theory is to prevail in negotiating positions.

Cafe Hayek has brought out this dilemma rather beautifully:

"Chief among these myths is the notion that the key to economic prosperity lies not in attending chiefly to the long-run interests of consumers but, rather, in attending to the short-run interests of producers – the false notion that the ultimate point of consumption is to stimulate production rather than the understanding that the ultimate justification for production lies only in the consumption it makes possible.   This myth is made especially pernicious because it is so politically convenient for office-holders and seekers."

Trade negotiators around the world, perhaps, would need to reflect on it.