Unprecedented or myth of globalisation?

Krugman recently in his NYT blog had commented on the unprecedented globalization that has taken place since the 1970s. The percentage of world trade to world manufactures and increased continuously during the last two-three decades.

"You see the interwar trade decline; the growth in world trade after World War II didn’t return to 1913 levels of globalization until around 1970. But since then, trade has grown incredibly. Interestingly, the big tariff cuts in GATT rounds had already happened; what we’re looking at here is trade liberalization in developing countries plus containerization, and the emergence of massive vertical specialization (iWhatevers being made in many stages in different countries)."

Thus, is the world getting more interconnected? As per traditional international trade theory is mercantilism or free trade fuelling this unprecedented globalization? Some still argue that there is a myth of globalization and there is a trend towards creating more jobs domestically than manufacturing outside. Nevertheless, whether goods are being manufactured outside or locally, more trade is definitely happening. What about services trade? Is that becoming increasingly globalized or is it still largely confined to domestic borders. In many countries services is the major component of the country's GDP - Is it also a major proportion of the country's trade?

Free trade Matrix

Interesting matrix about free trade and protectionism. The matrix found here draws inspiration from Cato's "Free Trade Free Markets" report mentioned here. 

There is an explanation too:

"Free traders are those that oppose both barriers and subsidies. Interventionists are those that support both barriers and subsidies. Isolationists are those that support barriers but oppose subsidies. Internationalists are those that oppose barriers but support subsidies."

Where do you stand?

Historical contexts and trade regimes

A good piece on the role of ideas, context and historical settings that shape international trade rules - "Thinking About Free Trade: The Role of Ideas in Shaping Trade Regimes" by Emma Bell-Schollan. 

Tracing the liberal free market ideology to be the basis of both 19th century and GATT rules, the piece notes the subtle shift in reliance and acceptability  of  "government intervention" or "domestic state support" in early GATT rules signifying the historical context of the Depression and failure of markets.

"The trade regimes of the late 19^th century and the post-War period shared a common root in the liberal economic ideas of Smith and Ricardo. Nonetheless, they fostered opposing policies regarding the role of government intervention in domestic markets. This difference was caused by the normative shift that occurred between the two periods, a result of the failure of liberal economic policies, which led to the Great Depression. In effect, these two free trade regimes were at the same time bound together, and pulled apart on the currents of ideas."

The role of the State and the market in the context of international trade has been an issue of long standing debate. Perhaps it would make sense to analyze positions from their historical context and time frames. A good read for anyone contesting the purely textual nature of international treaties.

Pragmatism, ideology and the middle path

Tread the Middle Path has tended to tow a moderate line on issues - avoiding ideological extremities and positions. There is always a middle path on several contentious issues that one can find if one is willing to rise above ideological prejudices. This is not to imply that ideology is in itself not worth following - it must be tinged with the realities of the time.

This piece titled "Defending Ideology" in the context of free trade by Tibor Machan refers to the ideology of pragmatism - referring to a belief in something that works, is practical and feasible. However he also refers to the importance of an ideological position.

"It is very common among intellectuals in our time to demean ideology. Thus if one supports, say, free trade with foreign firms, one is belittled for doing so on grounds of one's conviction that free trade is generally better than trade that is regimented by government. A "free-market ideologue" is what one is snidely called in such circumstances.... 

Pragmatic justifications usually focus on whether a policy works, whether it is practical. But how is that ascertained? How do we know whether a policy works? Well, is there sufficient evidence that it achieves the goal or purpose for which it is proposed? 

In the case of international free trade that goal or purpose would be mutual wealth creation. If through such trade the parties gain more wealth than by some other means, like government planning – setting quotas, protectionism, etc. – then free trade will have been pragmatically justified or vindicated; it will have been found the practical, workable policy to follow.  

... 

Then, of course, pragmatism is itself an ideology or theory of action wherein what is workable, practical, is preferred as against what isn't. Why should people proceed only when their objectives are feasible? Pursuing the impossible dream could well be a good policy for purposes of gaining stamina, for honing one's tenacity and grit. 

There is really no hope in resting proper public or even private policies on nothing more than that they are practical. Human beings need also to be sure that their choices, including those pertaining to public or political policies, are worthy, have overall merit, square with a proper moral outlook. Belittling that goal by labeling it ideology is a cheap shot. The issue should be which ideology makes the best sense not whether something is ideological."

Ideological positions in matters of international trade are bound to exist. We see it especially int he context of domestic policy space independence. Is the international economic order a neo-imperialist design or is it a boon for the developing world? Does trade with reduced barriers help countries to grow or does it stunt growth? While ideological positions are important to provide a historical perspective, it is also necessary, I think, for countries to take pragmatic, practical steps in order to benefit from the international economic regime. Merely criticizing it and rejecting it would neither provide the benefits. Engaging in a manner that pursues one's national interest in the context of the overall limitation of international rules seems to an ideology in itself worth pursuing. 

EU, BRICS and impact of Globalization

I came across two contrasting pieces on the impact on globalization on national economies.

"Globalization and the Crumbling BRICS: From Promises to Threats" brought out the dangers of over-reliance on globalization, and highlighted the importance of the growth of local economies in the context of BRICS. It also emphasized the interconnectedness of large economies like the EU and the U.S. with big emerging economies in Asia.

"Globalization now means that as long as Europe is in semi-collapse due to its inability to resolve its banking and sovereign-debt problems, and the US economy is stagnant and hostage to partisan struggles over state spending and taxation, emerging markets will not be able to pursue their past growth strategy. 

The real risk now is that facing high expectations and slow growth, the BRICS will turn from motors of the economy to threats of unrest and disruption.  China is facing an uncertain transition to new leadership amidst growing waves of strikes, environmental protests, and demands for greater openness and democracy driven by rapidly-expanding social media.  India is facing corruption scandals and a political transition as regional parties are supplanting the national consensus created in the past by the Congress party.  Russia has seen unprecedented protests against President Putin since his return to power in disputed elections, while its prospects for oil and gas exports are threatened by the rapid expansion of fossil fuel production through fracking in the U.S. and rising production in Qatar, Iraq, and Turkmenistan.  Brazil is perhaps best positioned to pursue domestic growth, as its ethanol-fueled economy and still-abundant land offer opportunities for its own population to improve their status.  But South Africa faces severe risks from a still greatly underemployed young population that has yet to benefit economically from the end of apartheid and confronts increasingly corrupt and ineffective national ruling party (the ANC). 

Europe and the U.S. had thus better focus hard on getting their own economic houses in order.  Far from expecting the BRICS economies to lead them to greener pastures, they may need all their resources and attention to deal with looming unrest and disruption in the BRICS as the latter struggle with an end to easy export-led growth and try to find new pathways to economic growth."

"Globalisation brings opportunities, not problems, for EU industries" stresses on the importance of export led growth for the EU. It calls for a more open Europe harnessing the advantages of the globalized world. Referring to a report on competitiveness by the European Union, it says:

"The report suggests that the EU pursues policies that increase openness to trade and better-target the promotion of R&D in process and market innovations. This will help local companies become part of global value chains, allowing them to reap the benefits of products produced abroad. Gaining access to these global value chains is paramount given that more than two-thirds of EU imports consist of intermediary products – that is, products traded among producers and suppliers. 

Off-shoring, which is when companies relocate a business process from one country to another, will also require that regulations evolve to adapt to the 21st century. The report therefore promotes policies that will increase the EU’s share of exports of finished goods from trading partners, particularly emerging industrial powers like China, Brazil and India. 

Closer to home, the report suggests ‘neighbourhood policies’ targeted at fostering trade in Europe’s backyards. Cross-border investment and trade with neighbouring countries are, in the words of the report, ‘low-hanging fruits’ that have not yet been utilised to their full potential. The report says that Russia, Ukraine, Switzerland, Norway and Egypt are some of the EU’s top non-EU trading partners.

There is perhaps no single way to achieve economic growth in a globalized world. The importance is perhaps to keep one's options open  and move forward in national interest. 

Globalization retreats?

(http://wiki.triastelematica.org/index.php/Protectionism)

Trends of a rise in protectionist measures by countries is considered a serious threat to an increasingly globalized world. While the world is getting connected and "flattened" by global supply chains and mobility, inward looking policies also have made their mark challenging the presumption that globalization is a given. Of course, Pankaj Ghemawat still believes that a large part of economic activity is still "national" or "local" rather than truly global. Parag Khanna,on the other hand believes that the world is moving towards more globalization.

I came across an interesting piece on globalization here. Titled "The Retreat of Globalization" Kevin M. Warsh and Scott Davis posit that the trend of globalization characterized by cross national investments and increased trade is on the decline.

"Trade is the glue that connects the global economy. Trade has grown much faster than economic growth for most of the last few decades, thanks largely to the globalization wave. Only twice since 1982 has global trade growth trailed economic growth. 

But trade has weakened over recent quarters. According to the International Monetary Fund, trade growth volume is projected to slump to 3.2% this year, down from 5.8% last year and 12.6% in 2010. The World Trade Organization recently cut its forecasts for global trade by more than a full percentage point for this year and next. Absent fundamental policy changes, these data mean that the IMF's global GDP forecasts for this year (3.3%) and next (3.6%) are challenging to meet. 

Yet even this cyclical weakness is not the gravest concern. What if the cyclical has become structural, and economic potential is falling? What if the world is getting more fragmented and the gains from globalization are being forgone and forgotten? What happens if policy makers remain preoccupied with short-term urgencies to the exclusion of long-term priorities?"

Protectionism is not the preserve of only a few countries. It is exercised by both the developed and developing worlds in times of economic crisis to protect domestic interests. Whether it actually protects domestic interests in the long run is an entirely debatable issue. Further, whose interests are actually protected is also open to scrutiny. Nevertheless, the increasing trend of "buy local" in France or aggressive "import licensing requirements" in Argentina is only symptomatic of a reaction of countries to address issues of economic crisis in a global world. As long as trade exists, there would be measures of protectionism. To what extent they spread and to what degree they violate trade agreements is the crucial factor.

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? 

Labour standards, tomato and trade

As a consumer would you prefer a product from another country made by adopting fair labour standards as compared to one made within the country with unfair labour means? While this is a question of individual conscience, this piece in the National Review raises a similar issue in the context of tomato grown in Mexico and the U.S. While I do not vouch for the veracity of the facts in the piece, it does make a point that international trade at times can be more equitable or justified in certain contexts. 

"Mexican tomato exports to the U.S. have grown rapidly, totaling about $2 billion a year and accounting for half the fresh tomatoes consumed during the winter months; the industry employs some 350,000 Mexicans in Mexico. The Florida farmers have seen their market share shrink and now want the U.S. government to limit the import of Mexican tomatoes.

But not the import of Mexicans. Mexican illegal aliens account for most of the workers in the Florida tomato industry, centered on the town of Immokalee. Worried that the government may get serious about ending illegal employment, the industry has been at the forefront of efforts to import unlimited numbers of foreign workers to slave away in their fields. And I don’t use “slave” to mean the captive form of labor represented by guest-worker programs. I mean actual slaves; there have been numerous slavery prosecutions of Florida tomato growers, whose exploitation of foreign workers is more brazen and appalling than any other industry in the United States."

On the condition of the workers this piece had more detail:

"I've seen estimates that nationally, 70 percent of the low-ranking farm workers are undocumented people from southern Mexico and Central America. These people arrive in this country — they're often shipped here from their home villages — and they arrive in a land where they certainly don't speak English. Many of them don't speak Spanish because they're indigenous so they're more comfortable in these indigenous languages." 

"They're stuck in the middle of the Everglades in some trailer camp. They don't know where they are. They're frightened to go to the police because they're here illegally and also because back home, the police are often thugs and you don't want to go to them anyway. So they're completely vulnerable. They don't want to make any noise — they just want to work, make a bit of money and that leaves them totally vulnerable."

However, there is flip side to this story.What if labour standards are used as a ground to restrict imports of goods? Labour conditions do differ vastly in different countries. Experts argue that the WTO is not the right forum to raise issues of labour standards. It could be used as protectionist tools n the hands of the developed world to restrict imports of products from countries that do not have the same standards as them. Thus while issues of labour conditions, minimum wages, working conditions are critical in the development discourse, linking it to trade may be detrimental to the very workers that it sees to protect.

A case for Protectionism? It was always there...

"Protectionism" today is a bad word. In the context of multilateral trade rules, it is forbidden and regressive. Countries publicly eschew protectionist measures, but in practice as is seen, follow them rather regularly. At times, it is argued that developing countries and emerging economies use protectionist tools more than the developed world. Actual study of policies may give a strikingly different picture. Is there a case for "protectionism"? Does history prove us different and surprising lessons?

David Todd in his "Protectionism as Internationalist Liberalism" explores this historical context from 1789-1914 where he argues that Germany, France and the United States have used "protectionist" policies as part of their official policy to counter the rise of U.K. He also puts forth the view that "protectionism" has been part of the larger liberal, internationalist, egalitarian left response to neo-liberalist philosophy since the 18th century and is not something invented in the 1930s.

"From the end of the nineteenth century, especially in Germany, protectionism has thus clearly nourished the xenophobic nationalism that ravaged Europe between 1914 and 1945. But the examples of Thiers, List and Carey show that protectionism was initially the result of intellectual exchanges among “dominated” nations, directed against the dominant power of the British Empire, rather than the expression of a thirst for nationalist domination. These examples also suggest that protectionism was often the economic aspect of an egalitarian liberalism of the left or the centre left, which put the citizen above the consumer. Contrary to the beliefs of many of their respective supporters, in our time as in the nineteenth century, the struggle between free trade and protectionism is not a conflict between good and evil. Tariff barriers do not mechanically lead to war any more than free trade guarantees peace, as is shown by the commercial treaty between France and Prussia in 1862, which did not prevent the outbreak of the Franco-Prussian War in 1870. Tariffs are no more and no less than taxes on imports, which – like all taxes – have both adverse and positive effects on wealth creation. As for their political significance and their economic consequences, these have varied considerably throughout history."

I am not a student of international economic history but this piece raises important questions - is there a good and bad in international trade theory at all or is it a matter of circumstance? Is reduced trade barriers and freer trade , ipso facto, good while "protectionist" measures bad? Do multilateral trade rules stereotype philosophical attitudes of free trade, protectionism and protection of domestic industry? Is there scope within the multilateral trade rules to be reasonably "protectionist"? Perhaps the "Free Traders" would have a far more convincing response to these queries. 

International Trade and development - Nexus?

One is often confronted with the question as to the relationship of trade and development. Does international trade lead to a country's economic growth? Does it reduce inequality and poverty? Does the liberlisation of trade and reduction of barriers to trade impact a country's economic growth? Does international trade have a bearing on providing access to a majority of people within countries to growth and opportunity? There is an abundance of economic literature on this subject. Does increasing exports and restricting imports have a bearing on inequality? Liberalisation of trade is not an end in itself. It is a means to growth and development. 

Recently, the OECD released a detailed report titled "Policy Priorities for International Trade and Jobs" on international trade and growth which has various articles on the impact of international trade on employment, growth, poverty reduction and inequality. The conclusions of the Report as summarised by the press release was as follows:

The report, a product of the International Collaborative Initiative on Trade and Employment (ICITE)*, analyses the complex interactions between globalisation, trade and labour markets. Drawing on numerous studies covering different parts of the globe and countries at very different levels of development, the report highlights the powerful role trade can play in driving growth and improving employment. 

• Of the 14 main studies undertaken since 2000 reviewed in the report, all 14 have concluded that trade plays an independent and positive role in raising incomes. 

• Through its impact on productivity, trade also raises average wages. Over the  1970-2000 period, manufacturing workers in open economies benefitted from pay rates that were between 3 and 9 times greater than those in closed economies, depending on the region. In Chile, workers in the most open sectors  earned on average 25% more in 2008 than those in low-openness sectors.

• Fears of the impact of offshoring may be exaggerated. Studies for the United Kingdom, United States, Germany and Italy  demonstrate that off-shoring of intermediate goods has either no impact or, if any, a  positive effect on both employment and wages.

The report also shows, however, that openness to trade is not enough. Complementary policies – such  as sound macroeconomic policies, a positive investment climate, flexible labour markets and adequate social safety nets – are needed to realise the full benefits of trade."

The piece on Latin America was particularly interesting. Titled "An Updated Assessment of the Trade and Poverty nexus in Latin America" it analyses the possible links between liberalisation of trade, poverty reduction and growth. Dwelling on the complexity of analysing the relationship between international trade and poverty reduction, the article concludes:

"Despite the complexity of finding a clear connection between trade liberalisation and poverty reduction in both theoretical and empirical studies, there is a nearly general consensus among academics that protectionism is not a suitable policy tool for eradicating inequality and poverty. It is also widely acknowledged that trade liberalisation is a means to achieve growth with poverty reduction and not an end in itself. Trade integration alone is in fact not sufficient to generate sustained growth, even less to promote development with equity and poverty reduction. Indeed, the literature reviewed so far very often  emphasises the fact that the distributive outcome of trade integration is inextricably intertwined with a wide array of structural and policy determinants. 

          ...

Trade openness, inequality and poverty are wide multidimensional concepts. Measuring and attributing causal relations among these variables without carefully qualifying the specific dimensions explored or the particular transmission mechanisms at play may be misleading. It is important to disentangle the specific dimension of the trade and poverty nexus from the wider debate on globalisation and financial integration, the competing concepts of relative and absolute inequality and the objective and subjective dimension of poverty and deprivation.

Despite the impossibility to rigorously and unambiguously assert that trade openness is conducive to growth and poverty reduction, the preponderance of evidence supports this conclusion. However, the majority of empirical macro studies also show that the impact of trade on growth and poverty is also generally small and that the causes of indigence are to be found elsewhere. But it is in fact extremely arduous to find evidence that supports the notion that trade protection is good for the poor. The question is therefore how to make trade and growth more pro-poor and not how to devise improbable alternatives to trade integration aiming at improving the livelihood of the poor.

          ...

Finally, considering that the trade and poverty nexus depends on a number of interconnected factors a consensus is emerging on the need to flank trade integration initiatives with a wide array of complementary policies. There is in fact increasing evidence that the outcome of trade opening may be regressive in the presence of distortions in complementary areas such macroeconomic policies, infrastructure, regulations, financial depth, labour markets, governance and human capital. 

It is therefore of the utmost importance to mainstream trade into the development agenda of Latin American countries and to align consensus, policy priorities and financial resources with the objective of making trade work for the poor. "

Can we generalise that international trade either negatively impacts poverty reduction or has a positive bearing on it? Is it a complex relationship that is far removed from sweeping generalisations? Can trade work for the poor? Can more people access opportunity by being part of the liberalised global economy? Is a liberalised trade regime only benefitting a few who can make use of the opportunities of open markets? Is protectionism the answer to the inequities of a liberalised system? What other national policies need to be in place to ensure that the benefits of international trade reach a large number of people? Is there a consensus on this? Do WTO rules facilitate the adoption of varied, multiple national strategies or do they restrict countries from adopting such policies? Is the relationship between trade and growth much more complex? While protectionism and inward looking policies may not necessarily bring about equitable growth, is there justification in having an uncritical endorsement of free trade and growth? Is there a middle path? Does the WTO rules allow, restrict or agnostic to countries taking this middle path?

Free trade vs. protectionism - Is there a middle path?

The free trade-protectionist debate has been a longstanding one. I came across some good piece on this debate, though I must confess, I am no expert on this:

1. Free Trade: A Litmus Test of Economics - This piece is rather critical of "mercantilist" protectionism in any form and is a "free trade" supporter all the way. Tariffs,quotas and regulation are signs of State intervention and are per se bad. Free trade is the extension of the free market and should be allowed to work.

"Free-market capitalism transfers wealth to those producers who can serve customers best, as determined by customers. Mercantilists focus on the desires of the domestic producers, not the desires of the customers. They want to protect domestic producers when foreign producers deliver better goods, as determined by customers. They are always ready to use state violence to protect domestic producers. They have been crony capitalists for 350 years."

2. Productivity and firm selection: Quantifying the ‘new’ gains from trade - As protectionist pressures mount worldwide, it is important to continue to shore up the case for open trade policy. This column presents new evidence from Europe on an old gain from trade – the weeding out effect – namely the way increased cross-border competition selects and favours the most productive firms. It argues that this mechanism brings about large gains.

"The reason is a combination of import competition and export market access. On the one hand, as lower trade costs allow foreign producers to target the domestic markets, the operating profits of domestic firms in those markets shrink whatever their productivities. On the other hand, some domestic firms gain access to foreign markets and get additional profits from their foreign ventures. These are the firms that are productive enough to cope with the additional costs of foreign activity (such as those due to transportation and remaining administrative duties or institutional and cultural barriers)."

3.So-Called Free Trade—Bad Policy and Wrong Debate - Critical of unbridled free trade, it argues that free trade does have serious "equity" issues and needs to be critically analyzed.

"Nineteenth century "free trade" theory may work well in a textbook, but it has profound conceptual, economic, social, environmental and political shortcomings in our real 21st century global economy."

4.Better Regulation for Freer Trade -  Focuses on the reality of "global supply chains" and argues that one needs better "regulation", in terms of standards, to take advantage of this 21st century reality.

"Over the past three decades, the production of goods—from electronics to food, clothing to cars, and medicines to furniture—has changed. Low-cost shipping, fast and reliable information communication technologies, and tariff reductions have allowed companies to unbundle and outsource manufacturing stages and intermediate services to specialist suppliers around the world. These global production models now dominate international commerce, with intermediate products comprising 56 percent of the global goods trade and 73 percent of global services trade."

The debate on free trade vs. protectionism is perhaps eternal and never changing. What changes perhaps are the contours of where to draw the line and what is acceptable. How much of free trade and how much of protectionism is a difficult question. Multilateral trade rules exist to answer some of these questions. However, interpretative flexibilities do not always provide clear answers. Is there a clear answer at all?

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. 

Protectionism - A wave or a whimper?

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 21^st 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.

France, Globalisation and Protectionism - Where will the dice roll?

(Courtesy: Chris Riddell, The Observer, 2009)
With a new government in place in France, I read with great interest this interview of the new Industry Minister  of France Arnaud Monteburg who had strong reactions against globalisation and seemed pro-protectionist. Some excerpts:

"We need above all to protect ourselves. [Globalisation] is an extremism because, without loyalty or law, without any limit, it has placed our territories, our industrial system, enterprises, wage-earners — in direct competition with countries which have wages 30 times lower than ours.

Social protection there is virtually absent, whilst wage earners [in France] after two centuries of social struggle have fair working conditions. And this competition has destroyed our industrial system. Furthermore, it has not greatly progressed emerging countries either. Some countries have escaped [poverty] and others have not. They have become poor."

Speaking about the need for unilateral Protectionism, he continued:

" To start with, this is a European strategy. And Francois Hollande, besides, in his campaign expressed himself very strongly on the necessity that Europe, if she is to be ‘Open’ should not be ‘offered’ [like a sacrifice]. Today we are unprotected against globalisation. [He uses the metaphor of a 'globalisation sieve'].

Even the European Commission is now recommending greater protection than any that existed before. Let us be clear. It is about re-orienting the European Union which is currently as ineffective as a sieve against globalisation. And we will need to ask for reciprocity: that which the Chinese, the Americans, the Brazilians…

The Brazilians have just decided come up with an incredible strategy: they have decided to tax every iPhone made by Apple in China that comes across Brazilian borders. The consequence is that Apple has decided to build a factory in Brazil. It is obvious that the European Union alone in our European continent has the power to do that. Therefore …”

Are we going to see a new wave of "protectionist" measures from France in the light of these observations? Are the measures proposed consistent with France's obligations under the WTO? Though there are no specific measures to analyse here, is the general trend of "reciprocity" in free trade, ie. engaging in protectionism against countries which do not follow free trade policies themselves, acceptable under the multilateral trading system? Can France selectively impose barriers to trade against those countries that it perceives are being protectionist? Does this not violate the principle of "most favoured nation" treatment under the GATT? France is also not a very active player in the dispute settlement mechanism of the WTO as compared to the US or China. Does this indicate the general reluctance to engage with an international dispute resolution mechanism that may have an impact on national sovereignty?

This detailed paper by Sophie Meunier titled "France, Globalisation and Global Protectionism" in 1999 (in the context of the Seattle opposition to the WTO Ministerial) gave a detailed analysis of France's attitude towards globalisation as well as the reasons for it. Is the opposition rooted in France's opposition to Anglo-Saxon and American dominance? It also brought out the dichotomy of France's participation in the globalised world economy as well as it's opposition to it.

"If politicians want to bolster their claims to a different, more democratic, more just world economy, they should work with their European partners on providing a sensible alternative. The main reason why they are not really doing this is the paradox that I stated at the beginning of this article: France is increasingly resisting globalization, while at the same globalization can be identified as the main driving force behind the recent success and modernization of the French economy. As long as politicians have not  found a way to resolve this fundamental tension, French opposition to globalization  will remain purely rhetoric –with clear domestic consequences, but little chances of affecting the rest of the world. "

This general resentment against globalisation in France has been explained in this piece in the YaleGlobal Online titled "Has European Protectionism Finally Triumphed Over Free Trade? French style of reciprocal protectionism wins new fans in Europe" by Justin Stares who explained the dominance of France's thinking in the European Union.

"The French believe they are under no obligation to trade freely with countries that are themselves not believers in free trade. "What we want is reciprocity," says Gael Veyssiere, spokesman for the French permanent representation to the European Union. "We believe in fair free trade. Why should we be the only ones to be completely open when others are not?" he tellsPublicServiceEurope.com. French ministers take this protectionist reflex to Brussels, where they find support from similar-minded nations such as Italy. They attempt to block takeovers on the grounds that certain French companies are strategic assets; they talk up "Buy European" campaigns such as the one now promoted by French President Nicolas Sarkozy, who is seeking re-election. "Europe has for too long been the idiot of the global village," former French foreign affairs minister Hubert Vedrine told Belgian newspaper Le Soir. "This has to stop," he said earlier this month. "Open your eyes: lots of countries that were yesterday aid recipients have today become dragons and huge competitors. We have to re-establish more balance between countries in the west and the emerging countries. Tensions will be inevitable. So what? We mustn't be afraid."

Is France's opposition more rhetoric than action? In the globalised world and the existence of multilateral rules, is a stand of getting back to protectionist measures just a mirage or a real threat? Will  France take concrete measures that can be perceived  as "protectionist" and how will its trading partners react? While Argentina is being accused of following a protectionist path recently with its import licensing procedures, will it be France next on the line? Will we see a WTO dispute against France soon?