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. 

Russia's national interest in the WTO

(Russian dolls and the global economy)

With Russia having entered the WTO, every domestic measure (automobile recycling duties and the duties on vegetable oil) having an adverse impact on trade is being scrutinized carefully. I have blogged about them here and here. Moscow Times has an interesting analogy of Russia's measures here:

"The logic of introducing the utilization fee immediately after joining the WTO is like that of a man who, feeling ill, visits a renowned physician to get the best diagnosis and prescription that money can buy, but then refuses to take the recommended medicine. Accession to the WTO enables the government to deal with lobbyists, but introducing the new fee immediately negates that advantage."

Will the Russian government be able to withstand the pressure of "domestic" interests to uphold their WTO commitments. While protecting national interest is not antithetical to joining the WTO (the U.S. speaks about national interest - interest of US manufacturers, US workers and US consumers all the time), it should not be blatantly violative of the provisions of WTO commitments. Will Russia be able to devise a smarter way of compliance yet protecting its national interest? Difficult line to tread? 

 

Indonesia - Turning protectionist?

(Indonesia - courtesy:worldwidehomestay.com)

I had recently blogged about Bali,Indonesia being the venue for the next Ministerial Conference of the WTO which is held every two years. Indonesia is in the news again in relation to trade news, but this time for all the wrong reasons. Complaints of Indonesia becoming increasingly "protectionist" are being heard from it's trading partners.

So what exactly is the complaint against Indonesia? Trends that Indonesia is increasingly looking inward in its industrial and trade policy are doing the rounds. More detailed analysis is found here and here. Specific import restrictions, export taxes and export bans on minerals are some of the measures causing unease amongst Indonesia's trading partners. Some believe that the restrictions are not excessive an justified.

An undated piece by Daniel W. Christman of the U.S. Chamber of Commerce highlights the dangers in the new policy:

"One recent measure makes it harder for foreign companies to export a range of products from specialty foods to shoes and pharmaceuticals to movies. The trade barriers seem to tilt the playing field unfairly in favor of domestic companies and may violate Indonesia’s obligations under the World Trade Organization. 

Last December, the government issued a decree requiring foreign companies to negotiate new import licenses. This effectively banned the importation of some 500 different products from sneakers and electronics to clothing and beverages. Chinese, Indian, and American companies will be unable to export their products to Indonesia until new licenses can be negotiated. 

Even more worrisome, the Ministry of Health issued a decree banning the importation of foreign medicines unless a foreign producer opens a manufacturing plant in Indonesia within two years. When initially asked to comment on this regulation, the health minister said, “If they (foreign companies) want to go away, go ahead.” 

The Ministry of Culture and Tourism followed suit by banning the sale of foreign films not printed in Indonesia. Among those likely to be harmed by this measure are Indonesian movie theaters that depend on foreign films for their revenue." 

The British Embassy in Jakarta had a few words of caution against the "protectionist" trend here:

" Indonesia’s credentials as an economic success story remain largely unblemished, but the regulatory environment is in fact becoming less friendly to foreign investment. A recently published Global Trade Alert report highlights the fact that in 2011 Indonesia introduced the largest number of potentially trade restrictive measures in South East Asia, and ranks it as among the top ten protectionist nation against three indicators - the number of tariff lines, sectors and trading partners affected. 

This tends to be obscured by the continued strong growth of the economy and by the many individual success stories. Foreign investors continue to beat a path to Jakarta. The report’s findings come however as no surprise to businesses located here.  One investor describes Indonesia as the most protectionist of its markets in South East Asia. Another complains about non-WTO compliant discriminatory excise duties. Banks will soon be required to invest heavily to on-shore their data processing centres.  Across a range of sectors – from petrochemical to pharmaceutical and consumer goods – foreign companies are struggling to make sense of, and to comply with, complex and unclear import licensing regulations. 

What particularly frustrates these companies is the lack of consultation and cross-government co-ordination when such measures are in gestation. As a result, many are ill-thought through and have unintended consequences, both for business and consumers.  Confusion over import licensing has led to a shortage of some medicines. Restrictions on the import of fruit and vegetables (apparently introduced as a consumer safety measure) have triggered price increases."

Whether Indonesia's trading partners will take Indonesia to the WTO DSM is a matter of conjecture at hi stage? Unlike Argentina which is involved in a large number of DSM cases, Indonesia is a relative novice. Do the measures of Indonesia violate the national treatment principles under GATT? Are they in violation of Indonesia's obligations under the Import Licensing Agreement? Are they technical regulations which are unreasonable restrictions on international trade? Thus, while Indonesia would have to prepare for the next Ministerial Conference, it would need to look into a possible WTO challenge to its domestic policy measures. 

Non-Tariff barriers - Protectionism's new name?

The issue of the use of non-tariff measures to advance "protectionist" objectives has been a subject of debate in international economic law and policy debates. While the last few decades has seen a fall in tariffs as a means of protection to local industry, non-tariff measures (NTMs) has become the new tool to ensure both achievement of public policy objectives as well as protection. The legal framework in the WTO that addresses the NTMs are the TBT and SPS Agreement. How much domestic policy space these Agreements provide for countries to pursue their national priorities within an international system and to what extent they prevent adoption of blatantly protectionist measures would require careful analysis.

A piece by Marc Bacchetta, Cosimo Beverelli in Vox titled "Non-tariff measures and the WTO" gives an overview of the use of TBT and SPS measures in the context of international trade.Are they per se protectionist or do they serve domestic public policy purposes? The WTO itself allows the use of NTMs to achieve public policy objectives. the TBT and SPS Agreements reflection of this. however, where does one draw the line between a legitimate use of NTMs for public policy objectives and it's use for protecting local industry in a discriminatory manner? It becomes more interesting when "protecting domestic industry" from "increased competition" itself becomes the stated public policy goal of an NTM. How does the WTO deal with this and what impact does this have on international trade, the multilateral regime and trade policy?

The piece highlights the steady growth of NTMs as depicted in the graphics below which is inversely related to tariff reduction of countries.

(SPS measures)

(TBT measures)

The piece argues that NTMs need to be regulated since they have a tendency to be protectionist and have a devastating impact on trade and costs. Non- transparency of measures is also an issue.

"One of the main challenges facing the regulation of non-tariff measures is where to draw the line between protectionist and non-protectionist non-tariff measures. In the GATT, the approach used is to allow domestic regulatory measures provided that they do not discriminate against the imported product. One of the issues that has arisen in connection with national treatment concerns the relevance and weight to be given to the rationale or purpose of the measure. The report argues that economic theory can help identify situations in which governments may be more likely to use non-tariff measures to address competitiveness concerns rather than the stated public policy rationale. Indeed, an analysis of the efficiency and incidence of the measure in question, and of the wider sectoral and political context would help identify the purpose of non-tariff measures."

Finding the right line to tread in the "protectionist"-"public policy" debate is an extremely difficult task. Further, the perceived loss of domestic sovereignty and increased tendency to replace tariff measures with NTMs to further national development strategies will make this debate even more complex and strenuous. The use of NTMs can adversely impact both developing as well as developed countries.While in the case of developing countries, NTM increase the cost of compliance to "new standards", for the developed world access to markets is impacted by NTMs. The recent AB reports in the COOL case and Dolphin safe tuna case indicate the growing importance of these measures in international trade policy. Treading the middle path will become all the more difficult.

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.