What Should Leaders Do to Stop the Spread of Protectionism?

Excerpt from the draft of the VoxEU.org ebook What World Leaders Must Do to Halt the Spread of Protectionism

December 8, 2008

On November 15, 2008, at the Washington Summit, G-20 leaders from across the globe acknowledged the severe economic downturn and pledged not to make things worse by trade protection. On November 24, at the APEC Summit in Peru, Asia-Pacific leaders pledged much the same. Mission accomplished? Protection averted? Hardly.

The task has just begun. Grade inflation is a disease of our era, and nowhere is the affliction worse than in the minds of national leaders. Left to their own scorecards, each and every leader will declare his or her government in full compliance, an A+ grade. Even Russian President Medvedev, who hoisted auto tariffs when he returned to Moscow, and Indian Prime Minister Singh, who jacked up steel tariffs soon after, see no inconsistency between deeds and words.

The G-20, led by its "troika" of current and future chairs ... should require monitoring of the agreed "standstill" on new protection.

In legal terms, the wayward summiteers are within their rights, even if their actions blatantly violate the spirit of their trade commitments. The World Trade Organization (WTO) allows members to impose a variety of measures to protect domestic firms: antidumping, balance of payments and general safeguards, Article XX exceptions for food and product safety (and possibly climate change policies), and boosting applied tariffs up to bound levels. Use of these measures tends to increase as economic conditions deteriorate, so 2009 could well see a boom in the erection of "WTO-consistent" trade barriers.

Much needed, before such breaches get out of hand, is an honest judge to cry foul when leaders betray their promises. The G-20, led by its "troika" of current and future chairs (Brazil, the United Kingdom, and South Korea), should require monitoring of the agreed "standstill" on new protection. And who should they pick to be the honest judge? Obviously the WTO, in the person of Pascal Lamy, with the full support of World Bank President Robert Zoellick and IMF Managing Director Dominque Strauss-Kahn. Every week the WTO should publish a running report card of raised tariffs, trade remedies, and other new policy measures that obstruct commerce. It doesn't matter whether the measures are WTO-compliant; what matters is that they are new and that they limit trade. Truly WTO-compliant measures might be marked with an asterisk (and perhaps clear breaches should be marked with a Scarlet A), but the point of the G-20 and APEC pledges is to stop the slide into the world of trade contraction, not to mince legal niceties.

Even with bold fiscal and monetary responses, guided by President-elect Obama and Fed Chairman Bernanke, hard times are likely to endure into 2010. The recession ahead is more likely to have the shape of an L flipped backwards on its side, than a V. If so, that will give plenty of time for opaque, but harmful, protectionist policies, implemented under the cover of other and often highly desirable goals.

First up will be industrial subsidies, starting with the bailout of the Detroit "little three:" GM, Ford, and Chrysler. Subsidies around the corner may well accelerate the closure of auto plants in Mexico and Canada; they will surely impede imports from Europe, Korea, and Japan, and they might even provide a platform for larger US auto exports. The same story could easily be repeated in other industries and other countries. WTO rules don't prohibit such domestic support, but the programs should be targeted at restructuring firms, encouraging innovation, and assisting displaced workers. Well before a rush to industrial subsidies appears in the offing, the Bretton Woods leaders should issue an urgent plea for nations to step harder on their fiscal and monetary accelerators, to support their credit markets and their consumers, but not to divert money into losing industrial firms.

On a somewhat longer horizon, the US cargo security initiative (CSI) poses a real threat to commerce, especially exports from developing countries. Very few ports in Africa, Asia, or Latin America can meet the 100 percent container scanning requirement mandated to take effect in 2012. Nor does 100 percent container scanning represent an efficient way to thwart terrorists. Under the joint leadership of the World Bank and the WTO, alternative means must be designed to ensure cargo security but to minimize the toll on commerce.

Meanwhile, many countries and subfederal jurisdictions are legislating measures-such as cap-and-trade systems-to limit greenhouse gas (GHG) emissions, especially carbon dioxide (CO2). But countries fear the competitive consequences of their actions, so they are devising border controls to avert "leakage" and to encourage other countries to limit their own GHGs. Unless the WTO quickly addresses these prospective measures, world trade could well face a thicket of new restrictions erected in the name of averting climate change that imposes unnecessary and unintended protectionism and has adverse consequences for the negotiation of a post-Kyoto global climate regime. What should be done? In the short term, WTO members should commit not to introduce border measures pursuant to climate policies. This "peace clause" would provide time for the completion of the post-Kyoto climate pact and also give WTO members the chance to fashion a code of good practice to say what border controls are, and are not, permissible under WTO rules.

Other protectionist threats, such as the Lacey amendment (on illegal logs and downstream wood products), emotional food safety standards, and the coming flood of antidumping actions, could be recited. But the message is broader and goes beyond individual trade restrictions.

The time is at hand when the WTO, backed up by the World Bank and the IMF, must mount an energetic defense of the world trading system we now enjoy. The G-20 countries should make good on their summit commitment by promoting agreements on modalities that presage an ambitious and balanced Doha outcome on agriculture, manufactures, and services. To that end, the group should consider an early harvest of reforms already developed in the Doha negotiations, such as the agreement on trade facilitation and the elimination of farm export subsidies.

Completing the Doha Round would be a signal accomplishment. Allowing the current trading system, erected after a half century of hard work, to be destroyed by army ants would be a true disaster.