This is No Time for Complacency in the Fight Against Protectionism

Policymakers on both sides of the Atlantic have pointed to what they see as the “green shoots” of economic recovery. However, this column shows that the people who undertake international trade aren’t taking a sanguine view about trade protectionism. Governments need to eschew all forms of beggar-thy-neighbour policy and follow the five steps described below. This is no time for premature self-congratulation on a victory over protectionism.

In the past month or so senior policymakers on both sides of the Atlantic have pointed to what they see as the “green shoots” of economic recovery. While no one is claiming that the global economic downturn is over, elements of (often self) congratulation are creeping into the public statements of our leaders. Nowhere is this more so than with protectionism, policy tools which discriminate against foreign firms and workers that were discredited in the Great Depression. Just recently, for example, the Director-General of DG Trade told Finnish officials that “by and large governments have done quite a good job resisting” protectionism and that “the situation is under control at the present time” (Reuters, 20 April 2009). Is this attitude warranted or does it reveal complacency?

New research findings

It would seem not everyone is so upbeat about the battle against protectionism. The IMF and World Bank’s recently published Global Monitoring Report (2009) states that since September 2008 “[al]though there is no general trend, a pattern is beginning to emerge of increases in import licensing, import tariffs and surcharges, and trade remedies to support industries facing difficulties early on in the crisis.” Hardly the vanquishing of protectionism, then.

Worse, a mid-April 2009 survey of supply chain managers for manufacturing firms from Europe, North America, and Asia reported that “With 84.2% of survey respondents noting that protectionism could lead to a global depression, another 60.3% said it could cause a collapse of globalisation. And on an individual company basis, 20.7% said growing protectionism would result in a significant reduction in export activity and business slowdown, with protectionism possibly leading to an increase in materials sourcing costs, according to 17.2% of the respondents.” The punch line here is that the people who actually undertake international trade aren’t taking a sanguine view about trade protectionism.

Unemployment will continue to rise fuelling protectionist pressures

Looking forward there are other reasons for greater vigilance against protectionism, rather than self-congratulation and complacency. If anything the macroeconomic factors that make politicians and senior officials more likely to resort to protectionism will intensify. According to a recent speech by the Chief Economist of the IMF, Europe has only experienced a small fraction of the job losses and unemployment that this downturn will bring. Moreover, most forecasts released in the past month show a marked deterioration in the economic outlook for 2009, with actual recovery postponed for many countries until 2010 or 2011. The temptation to shut out imports and discriminate against foreign migrants and investments will intensify in the quarters ahead, threatening the hard won gains of two decades of global economic integration. For all of these reasons this is no time to be complacent about protectionism.

If it happens, it won’t look like the 1930s protectionist spiral

What the optimists are correct in saying is that there has been no across-the-board increase in trade barriers similar to that witnessed in the 1930s. This argument would contain a lot more force had industrialised country governments not resorted to widespread use of subsidies and credit guarantees. Like their 1930s predecessors, these current interventions seek to improve the commercial viability of domestic firms, effectively shifting the pressure for adjustment on to firms located abroad to reduce output, announce job losses, and in the limit, go into bankruptcy. In short, many of our policymakers are probably just as short-sighted and parochial as their predecessors from the 1930s.

Some have also contended that this global economic crisis is not on the same scale as the Great Depression. Presumably, this means whatever sins policymakers are committing with protectionism can’t really be that bad, can they? It is certainly true, thank goodness, that unemployment rates have yet to reach anything like the levels endured during the Great Depression. (US unemployment rates, for example, reached 25% during the 1930s.) However, recent research has shown that global output and trade are currently following the same trajectory as that experienced in the early 1930s, which is hardly reassuring (see Eichengreen and O’Rourke).

Given the scale of the monetary and fiscal stimuli that started being implemented in 2008 and will continue to be phased-in through 2010, avoiding the joblessness rates and output collapse of the 1930s is unlikely. But it is not inevitable. The task of economic recovery has, at best, just begun and now is not the time to weaken our focus and abandon long-standing commitments to an open world economy.

While there is a lot governments can do at home to promote recovery, there is a case for stronger international cooperation, especially in the area of limiting protectionism. For sure, government leaders made another pledge at the recent G20 summit in London not to raise trade barriers. But in the month since the President of the World Bank has reported that nine of the London conferees have done exactly this. The surveillance and “naming and shaming” that some leaders called for simply does not have enough teeth. When talk is not backed up by action it undermines credibility, a precious commodity at a time when restoring the confidence of the private sector is a vital objective.

So what should policymakers do? Ideally, they should take the following five steps summarised below.

Step 1: Follow Keynes at home and Smith abroad

The first step has been neatly called “Follow Keynes at home and Smith abroad.” (See Ann Capland’s chapter in the latest Vox Ebook.) Here the goal is to use intelligent Keynesianism to design fiscal stimulus packages that revive demand for goods and services. Generous treatment of the unemployed and displaced, who tend to spend proportionally more of their income than most, helps reconcile economic and social imperatives. Of course there are concerns about the sustainability of some governments’ debt and many wish that these governments had been more fiscally responsible before the crisis, but if there was a time when deficit-financed expansions in aggregate spending are needed it is now.

The modern incarnations of Messrs Smoot and Hawley should be reminded that the economies that spent proportionately more on imports before the crisis were cushioned to a greater extent on the way down. After all, the more open an economy was before the crisis the more falling expenditure fell on foreign suppliers and their employees. In other words, the more open economies shifted more of the burden of adjustment abroad.

Restricting imports now–whether through blatant protectionism like tariffs or more murky measures like credit guarantees and hidden subsidies–will invite retaliation and harm export industries that tend to pay higher salaries on average. Export dependent economies, like Germany, are particularly vulnerable to protectionism abroad and should be in the vanguard in the fight against protectionism.

Step 2: A global surveillance mechanism

The second necessary initiative is to put in place a global surveillance mechanism in place to hammer protectionist measures. February 2009 was a bad month for cynics who think that politicians always cave into protectionism. Visceral condemnation of proposed US Buy American legislation by the European Commission, China, Japan, and many of America’s trading partners resulted in President Obama rejecting these proposals and them being substantially watered down (but not entirely abandoned) in the US Senate. In the internet age only the deluded believe they can practice protectionism in secret. Assemble a team of independent experts to track protectionism and issue warnings in real-time. Notify the likely victims of protectionism and give them the information to put pressure on decision-makers.

Step 3: A temporary, legal-binding standstill on protection

Third, nations should commit to a temporary, legal-binding standstill on trade restrictions. Current trade agreements are far from perfect and there are plenty of trade-distorting loopholes that can be exploited. For every major type of trade policy, including those relating to agriculture, manufactures, government procurement, and dumping, government leaders should commit not to raise trade barriers for the duration of the global economic downturn.

Moreover, governments should commit to implement the least trade-distortive measures to assist firms and workers. To back this up governments would commit to consider several measures when deciding how to “help” an industry, to demonstrate that its ultimate choice of measure was based on actual evidence and current knowledge about relative effectiveness, and promise to review the implementation of the measure no less than 12 months after it was implemented. There would be a presumption that grossly under-performing measures and measures likely to perform worse in the future that some less trade-distorting alternative would be removed. In these suspicious times, few are prepared to give their trading partners the benefit of the doubt. Governments must, therefore, be seen to be choosing policies appropriately if they are not to trigger retaliatory measures. These steps would put teeth into previous G20, G8, and APEC declarations and rebuild private sector confidence.

Step 4: Don’t abandon developing nations

It is also important that developing countries are not abandoned during the economic crisis. Government budgets may be under pressure but the temptation to renege on aid commitments should be resisted. Further destabilising poorer countries when their economies are on their back, all for the sake of saving amounts of money that pale in comparison to the average bank or automobile bailout is short-sighted foreign and economic policy. It will encourage further migration to the West and harm diplomatic relations for years to come. The damage done to the Millennium Development Goals could be incalculable.

Step 5: Trade facilitation as foundations for export-led recovery

Finally, governments should take steps to lay the foundations for a worldwide export-led recovery. Cutting red tape and supporting transport infrastructure improvements in developing and industrialised countries will help clear the arteries of the world economy. Ports and airports are some of the worst bottlenecks facing commerce, as anyone who has run a supply chain will tell you. Use the momentum of the crisis to overcome self-interested defences of the status quo and to accelerate the completion of the WTO’s current negotiations on trade facilitation. Once that negotiation is completed, implementation should begin as part of national stimulus plans. The accord itself can become binding when the Doha Round is completed (so don’t let arguments about the accords enforceability slow down implementation.)

Together these measures represent a cosmopolitan approach in that the measures taken would foster restoring economic health at home and abroad. Only when governments eschew all forms of beggar-thy-neighbour policy will we have truly learned the lessons of the Great Depression. A time when many countries are experiencing the sharpest falls in national output in decades should not be one of complacency and premature self-congratulation about a partial victory over protectionism.

Editor-in-Chief’s note: A German-language version of this column was published by Berliner Republik, http://www.b-republik.de/. VoxEU.org is publishing and copyrighting the English version with permission.

References

Reuters (2009), World largely avoiding protectionism – EU official, Helsinki, 20 April
World Bank and IMF (2009) Global Monitoring Report 2009: A Development Emergency, Washington, DC

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