Monday, July 4, 2011

Trade Protectionism: Is there a way out?

The outbreak of global protectionism would cause catastrophic economic hardships across the globe. It would also severely undermine the future viability of WTO and its progress so far.

One of the most feared economic consequences of the global financial crisis of 2008 has been the protectionist juggernaut by governments. As the global economy begins to emerge from the worst economic crisis since the Great Depression, there is a growing concern that rising protectionist spiral could short-circuit the nascent global economic recovery. Despite repeated promises by the global leaders to minimize trade barriers, protectionist measures have been rising. According to a report released by Global Trade Alert (GTA), a trade policy think tank based in Europe, the accumulated number of protective trade measures across the world increased from 85 in July 2009 to 297 as of December 9, 2009. In the second quarter of 2009, though many economies have turned the corner, protectionist pressures have not softened. The GTA report reveals that the protectionist dynamics were worst in the first three quarters of 2009, but protection ism hasn’t yet reached the scale of the 1930s —but water doesn’t have to boil to scald.

To discriminate against foreign producers, protectionist measures like higher tariffs, import quotas, exchange controls, immigration restrictions and export subsidies are being planned by governments around the world to secure their own economic interests. Even the US, the global free-trade champion has imposed 46 separate protectionist measures on goods and services trade with the outside world. The EU implemented 90 and countries like China and India introduced 51 and 29 of such measures. The GTA report says this tendency is particularly worrisome. Global trade flows have already suffered their sharpest drop since the 1930s and trade analysts expect global trade would fall more than 10% this fiscal with both supply and demand hit hard by the recent global financial crisis. The trade volume will decline mainly on account of shrinking economies, lack of trade finances and protectionism measures by governments.

Rising Trade Conflicts
The trade ties between China and the US, generally labeled as the ballast and engine for overall bilateral relations, have witnessed intensive exchanges in 2009 amid soaring trade disputes. In the first three quarters of 2009, the US launched 14 trade remedy investigations against China, involving $5.84 bn, a year-on-year rise of 639%. Political pressure for protectionist measures is increasing not only in the US but also in the European Union. As the trade between these nations simmers, the US federal government recently announced a new $2.8 bn tariff on Chinese steel imports. Other economies are beginning to follow the US lead as well, imposing trade restrictions from antidumping duties to more subtle policies like tougher standards. Critics warn that Obama administration stance could provoke similar moves by other countries that could cut off vital export markets at a time when American manufacturers and service providers need them most. Against this move, China has already launched efforts to restrict imports of American auto parts and poultry products.

In fact, protectionist measures are common for the US government. When it imposed a tariff on steel during the Bush regime, most steel products were affected adversely. While the tariffs are not as broad-based this time, the problems can be intensified due to the considerably weakened position of the US economy. There is no doubt that the trade ties will encounter disputes from time to time during the process of cooperation.

Nevertheless, analysts believe “the interdependency is not poised and China’s excessive dependence on exports and the US excessive dependence on consumption are not sustainable. Whether or not their relations will develop healthily and continuously is of great significance to the economies of the two countries, and even that of the world.” However, Chen Dongxiao, Vice-President, Shanghai Institute for International Studies opines, “It might be a zero-sum game for both China and the US when it comes to specific industrial sectors, however, it is a positive-sum game for their overall economic relations.”

Disorderly Global Growth
By opening the gates to foreign investment and manipulating its currency from rising against the dollar, China’s economic strategy has been remarkably successful over the last two decades. Thus, the dragon hobbled itself to consumers in the industrial world and achieved outstanding growth. Whilst the strategy is still working for China, it is worsening economic security around the globe. As it continues this strategy, other economies have started using their last available weapon, protectionism measures to stop the surge of artificially cheap Chinese goods. This is the reason why trade analysts always quote: “a trade war is easy to start and hard to contain. It could hit everybody’s exports, disrupting growth everywhere.”

The dragon has flooded the globe with exports and has edged out suppliers from other developing nations. Now its economic strategy is doing considerably more harm than in the past. Amid global slowdown, many countries fiscal stimulus efforts have been weakened by inflows of cheap Chinese imports and absorbed some of the money added by government’s stimulus packages. If China continues its present currency policy, trade experts say it will make even more difficult for the global economy to revive. As overstrained governments settle down their fiscal stimulus, many other economies will have to rely on exports as a crucial source of demand while their consumers are reorganizing their personal finances.

Henceforth, if China sticks to its cheap-renminbi manipulation, it is bound to draw a protectionist response from its trade partners. The US government has already imposed exceptional tariffs on Chinese tires and antidumping duties on steel pipes. Indian officials also filed a stack of trade complaints against China. Even the APEC (Asia-Pacific Economic Cooperation) urged the adoption of ‘market-oriented exchange rates’ for Asian currencies, a reference to China’s manipulation. Trade experts opine “A trade war with China would be disastrous and bound to escalate around the world. Restraint is needed. But we fear no one is going to feel restrained if China doesn’t change its strategy.”

Wider Economic Implications
The outbreak of global protectionism would cause catastrophic economic hardships across the globe. It would also severely undermine the future viability of WTO and its progress so far. Sergio Marchi, Senior Fellow, International Centre for Trade and Sustainable Development (ICTSD) warns that “Protectionism would severely disrupt crucial trade traffic flow, and create chaos at that intersection. Economically painful for countries, big and small alike, but they would also deliver a severe body blow to the very values embodied by the WTO.” In a globalized world, there is no haven to hide from global storms. In times of economic crisis, countries seek to protect their own industries and jobs. The political mood in the US is uncongenial to free trade, and Europe faces similar pressures. However, economists suggest that “Whatever their downsides, economic integration and free markets remain the best strategies for prosperity and growth, for developed and developing economies.”

Therefore, governments must take steps to stabilize their economies, protect their citizens and prepare their countries for the recovery. Lee Hsien Loong, Prime Minister, Singapore, advocates, “after having witnessed a spectacular failure of untrammeled free markets, we must not swing to the other extreme. Governments and regulators clearly need to improve how they set the rules, supervise financial institutions, and monitor risks to the system as a whole. But human nature being what it is, we can’t prevent crises from happening.

We can only hope to reduce their frequency, and the damage they cause.” According to the World Trade Organization and other international bodies, the world has not relapsed into 1930s style beggar-thy-neighbor protectionism. So far, countries have largely avoided self-defeating protectionist measures. However, trade analysts suggest that “they must stay the course as unemployment stays high, and muster the political will to revive the Doha Round of world trade negotiations. The US must exercise leadership, and other major players must be prepared to close the last gaps and seal a deal.”

Whether it is China or the US, protectionist measures will simply make everyone worse off, leaving consumers with fewer choices and higher prices. Therefore, governments need to swallow their pride and drop the tariffs. If the free-trade champion doesn’t lead on free trade, no one will. Daniel J Ikenson, Associate Director, Center for Trade Policy Studies, the Cato Institute, foresees: “Despite the global economic contraction and the occasional protectionist indulgence, there is reason to be hopeful that retrogressive policies will be marginal, short-lived, and ultimately rejected.” During the Great Depression, there were no proven stopgaps to prevent the pandemic of spiraling protectionism that erupted and exacerbated the global recession. But today the world has solid institutions and incentives to help steer policy-makers away from the abyss. More than eight decades of trade relaxation rules have brought about greater confidence and stability, and thus more investment, trade, and economic growth. Daniel further adds, “today, the commercial  and political appeal of protectionism is considerably diminished because most countries have established domestic constituencies that depend on a trade and investment environment that is open in both directions.”

Lessons to learn
The fight against trade protectionism is far from over going by record levels of unemployment in some developed countries which, in turn, generate more and more concerns. In future, the global economy prospects will depend on governments effective and harmonized steps to address deeper, more difficult problems. Challenging days lie ahead for the international trading system as some Nobel Prize-winning economists in the US are resorting to arguments of protectionism against China as a recipe to cure the jobless rate in their country. They predict, “it may be too early to conclude that the US will be in a trade war with China. Yet, serious US acts of trade protectionism against Chinese products coupled with the departure from the very broad consensus among economists for free trade.” The lesson to be learnt for the policymakers is that it is the interest of every country to keep global trade flowing smoothly. A healthy trade environment can help revive the world economy, if not, history could repeat itself. The fact that international trade system sailed smoothly in 2009 indicates that the world leaders have learned the lessons of the past to prevent trade protectionism from further worsening the global financial crisis. The recently concluded G-20 summit, the participants insisted that they understood “the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty.” Notwithstanding, the later initiatives taken by them indicate that during the times of slowdown, it is often difficult to stick to the greater good.

N Janardhan Rao, Lead Economist.