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  • THE PERILS OF PROTECTIONISM

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    The Perils of Protectionism

     

     
     
    International Trade Forum - Issue 1/2009

    History shows that open markets are crucial in times of crisis. Leaders need to step away from purely domestic concerns, and ensure they're not threatening the world's economy further by imposing dangerous protectionist measures.

    In attempting to secure their own economies, it's imperative that world leaders resist the temptation of protectionism. There is hope: we have a rule-based world trading system in the World Trade Organization (WTO), and a United States Administration that is ready to re-adopt a Keynesian policy to counter the business cycles, alongside other governments. But this crisis situation is worse than anything in post-war history, and it is befitting to remind ourselves how bad things did get.

    Learning from history

    From the collapse of 1929, it took the United States a whole decade, indeed to 1939, to get back to where it was in terms of its Gross Domestic Product (GDP). At the worst point in its history, four years after the first Wall Street crisis broke, the country's economy had shrunk by as much as 29%. Under pressure to protect farmers and industries, the United States Congress produced the Tariff Act of 1930, commonly known as the Smoot-Hawley tariff.

    This legislation prompted foreign retaliation, which plunged the world deeper into the Great Depression. Smoot-Hawley now is shorthand for the beggar-thy-neighbour policies of the 1930s. Overall, world trade declined by some 66% between 1929 and 1934 (see Chart 1).
    Western Europe went through an equally devastating crisis, although recovery started earlier: in 1932 for the United Kingdom and 1933 for Germany. Of course, this recovery was not sustained; the German war-economy finally crumbled in 1944 and it lost two-thirds of its GDP over the following two years.




    Chart 1. Source: ITC


    Chart 2. Source: ITC

    Now is the time to resist protectionism

    Fighting protectionism does not address the causes of the crisis - for that we need to change the culture of lax risk-management in a booming financial sector. But rejecting protectionism will help to limit transmission of the crisis to other parts of the globe, notably the developing and emerging economies.

    Such transmission is happening in any case, but we need to limit its contagion. Trade is the engine of global growth and it is sputtering - the Organization for Economic Cooperation and Development's (OECD) recent forecast speaks of a decline in world trade of 13%. The recent Spring Meeting of the International Monetary Fund and World Bank yielded its bleakest global growth and trade prognosis since the creation of the Bretton Woods system back in 1944.

    The ITC Trade Map uses high-frequency data to gauge the impact. The United States trade data reveal a steep import contraction: whereas imports had historically been increasing by some US$40 billion a month, they were contracting by $58 billion in February 2009 (see Chart 2).

    The monthly export data for African and Asian emerging and developing countries, hugely relying on OECD locomotive growth, paint a bleak picture. Mexico, Thailand, South Africa and even China had sharply negative growth on exports, compared with the previous year (see Chart 3). ITC research about the likely impact of the OECD slowdown on the exports show that oil-exporting countries, such as the Gulf countries, will lose most in export revenues, followed by European transition countries. Developing countries will be severely affected too, especially those that rely on exports to OECD countries and remittances from the BRIC (Brazil, Russia, India and China) nations.

    For trade to remain the engine of growth, it has to be managed not just in accordance with the rules, but also in accordance with the intentions of the rules. It should not become acceptable for any country or trading block to say that it is in compliance with its WTO obligations, while it is in effect raising tariffs or increasing trade restrictions and non-tariff barriers.
    But higher tariffs will not be the major part of the perverse trade agendas. A first casualty of this crisis may be the Doha Round itself. While shedding crocodile tears about the never-ending negotiations, some players may quietly feel little regret about aiding those who are stalling its completion. But although the Doha Development Agenda leaves much to be desired, letting it wither away will mean that potential gains will not be realized for at least another decade.




    Chart 3. Source ITC

    Nurturing open trade for the future

    It is time to discuss a 'post-Doha agenda of trade stimulus'. At a strategic level, this new post-Doha agenda can address the concerns of some of the G20 players, especially the emerging economies, who feel that they are now asked to increase their commitments because of a crisis they did not cause. But it is inevitable that the emerging economies will have to play some part in fixing the global economy, even if they didn't break it.

    Many countries have now adopted major stimulus packages, including the United States, China and Japan, which will be implemented within the next two to three years. It is absolutely imperative that these stimulus packages promote trade and seek to nurture and capture improved productivity. We must resist the temptations of using these stimulus packages to substitute imports; favouring buying or producing only domestically; or subsidizing exports in opaque and non-transparent manners. That sort of protectionism will bring about precisely the kind of recrimination and beggar-thy-neighbour policies that characterized the great and long depression of the 1930s.

    We have to now fight protectionism at home and abroad, with an agenda of free and fair trade.