"Leaders must not heed the siren-song of protectionist fixes, whether for trade, stimulus packages, or bailouts," said World Bank Group President Robert B. Zoellick. "Economic isolationism can lead to a negative spiral of events such as those we saw in the 1930s, which made a bad situation much, much worse."
The cost of inaction on the Doha Agenda is rising, the World Bank study cautions. To date most countries have not yet raised tariffs to bound levels or taken full advantage of headroom on agricultural subsidies. However, as the recession deepens, many countries may be tempted to. This threat underscores the importance of pushing forward with a rapid conclusion of the Doha round.
The study suggests that the G-20, for its part, could adopt additional measures that would strengthen the fragile consensus against further protectionism. The G-20 countries could, for example:
* Commit to greater transparency by agreeing to provide quarterly reports on new trade restrictions, and industrial and agricultural subsidies to the WTO, together with a mandatory analysis of the trade restriction on employment (since this would create new room for technical analysis and political discussion in countries themselves);
* Advocate greater Aid for Trade for low-income countries; and
* Seize the opportunity to support global trade in a time when it desperately needs to be supported, including making progress at the technical level on the Doha Round, even while formal negotiations are in abeyance.
Additional Information
Although the effects of these protectionist measures so far are probably minor relative to the size of unaffected markets, they are of considerable importance for particular exporters shut out of protected markets, the World Bank study shows. Tariff increases comprise only about a third of these actions and a half for developing countries. For example, Russia raised tariffs on used autos, and Ecuador raised tariffs on more than 600 items. Non-tariff measures include such policies as Argentina’s imposition of non-automatic licensing requirements on auto parts, textiles, TVs, toys, shoes, and leather goods, or Indonesia’s requirement that five categories of goods (including garments, footwear, toys, electronics, food and beverages) would be permitted in only five ports and airports.
In some countries, tightening standards have slowed import entry, notes the World Bank study. These include, for example, China’s import ban on Irish pork as well as rejection of some Belgian chocolate, Italian brandy, British sauce, Dutch eggs and Spanish dairy products, and India’s ban on Chinese toys, Export subsidies are particularly egregious because they contravene the draft Doha modalities. The EU announced new export subsidies on butter, cheese, and milk powder. Less obviously, both China and India have increased the rebate on the duty drawback system for exporters, and, although the subsidy component is a matter of discussion, the timing of these measures raises questions.
Subsidies proposed for the auto industry have proliferated and total some $48 billion worldwide, mostly ($42.7 billion) in high-income countries. In addition to the US direct subsidy of $17.4 billion to its three national companies, Canada, France, Germany, United Kingdom, China, Argentina, Brazil, Sweden and Italy have also provided direct or indirect subsidies – not including Australia’s support to its car dealers and South Korea’s and Portugal’s support to their component suppliers. To the extent that the industry is laden with excess capacity, these subsidies impede exit and delay adjustment. Even worse, subsidies may be linked to requirements that companies to preserve domestic employment, even at the cost of shutting more efficient plants abroad in developing countries. Moreover, to prevent this, governments have had to react to the policies of neighbors – so, for example, Canada has matched the subsidies the US gave Detroit auto makers to ensure that Canadian plants of American producers would remain open.
The study notes that several factors have clearly muted protectionist pressures and distinguish this global downturn from the pressures of the 1930s. Countries are far more interdependent through supply chains, imported inputs, and even services. Export interests are far more powerful than before relative to pure import-competing industries. Producers for the domestic market are more reliant on imported inputs, and production chains link global markets through a web of trade in parts and components. The simple average of trade-to-GDP is today 96 percent compared to 55 percent in 1970 – and parts and components trade, an indicator of supply chains, has more than doubled as a proportion of total trade.
In addition, successive GATT/WTO agreements have provided much greater legal stability of trading relations. Because of this quite different political economy today, a few proposed restrictions have been rejected or not enacted. In Brazil, for example, the bureaucracy attempted to impose widespread licensing arrangements and import controls reminiscent of the 1970s, only to provoke a response of outrage from the private sector that led to immediate reversal. Similarly, the more egregious forms of the Buy America provision appear to have been circumvented. Moreover, about 10 of the 77 proposed and implemented changes in trade policies involved steps toward greater liberalization, mostly related to free trade agreements.
