 |
| Home > V4N3 Fall 2009 |
|
|
|
V4N3 Fall 2009 > Feature Essays
|
|
| [September, 2009] |
|
Battling Protectionism in the Global Financial Crisis
By Shujiro Urata |
Asia’s export-oriented economies were particularly hard hit by the effects of the global financial crisis, as demand from major importing countries plunged in response to the crisis.
Despite the temptation to resort to trade protection, now is the time to renew commitment to trade liberalization, argues leading Japanese economist Shujiro Urata.
|
|
|
THE GLOBAL ECONOMY STARTED to contract sharply in the second half of 2008 as the financial crisis caused by a dramatic rise in mortgage delinquencies and foreclosures in the United States was transmitted to the rest of the world. The fast-moving turmoil spread to other countries mainly through two channels — financial markets and foreign trade. The financial crisis in the form of a tightening of credit in the US led to a similar situation in other countries, resulting in economic slowdown.
The near-collapse of financial markets was felt quickly in Europe but not in East Asia because the region was not as exposed to international risks as their counterparts elsewhere, largely thanks to lessons learned from the Asian financial crisis of 1997-98. Initially, Asian officials thought they would be free from any serious impact. However, this optimistic view was quickly overturned as the effects of the crisis in the US and Europe spread to Asia through foreign trade. With the dramatic slowdown in the West, there was a sharp decline in demand for imports from East Asia that depressed overall economic activity. Indeed, the “decoupling hypothesis” — the argument that East Asian economies would be immune to a crisis because of increasing intra-regional trade — was proven wrong.
Before examining developments in foreign trade, let me quickly review recent global economic trends and future prospects. Global growth in gross domestic product started to decline in mid-2007 and continued downward, registering a contraction of 6 percent in the second quarter of 2008, annualized quarter-over-quarter growth (Figure 1). The International Monetary Fund projects that global GDP growth rates will start to climb in 2009. Although the year-on-year growth rate for 2009 is projected to be down 1.4 percent, 2010 is projected to see growth of 2.5 percent. The IMF also notes that it expects wide variations in GDP growth among countries and regions. An improvement in financial conditions thanks to government interventions and sizeable stimulus packages are seen as the main factors contributing to the recovery.
Global trade contracted sharply in late 2008 and the contraction continued into the first quarter of this year (Figure 2). Countries in all regions, and at all levels of development, experienced declines in export and import volume, but developed countries have been hit hardest, especially major exporters, like Japan, of automotive products and other machinery. Japan’s exports began to decline in late 2008, and by early 2009 had contracted as much as 40 percent.
Although the rate of decline in global trade is slowing, the World Trade Organization forecasts the volume of trade in goods will still fall by 10 percent in 2009. Developed countries are forecast to experience a larger contraction (down 14 percent) compared to developing countries (down 7 percent). Some of the concerns expressed by the WTO regarding the prospects for global trade include persistent high unemployment rates, a rise in oil prices and a possible worsening of the H1N1 flu pandemic.
It should also be noted that countries with high export-to-GDP ratios have suffered more during the current crisis than those with low export-to-GDP ratios. For example, heavily export-oriented countries such as Singapore, Taiwan and South Korea experienced sharper declines in growth than Indonesia and the Philippines, which have lower export-to-GDP ratios and consequently rely more heavily on their domestic markets for economic activity. This does not mean that countries should opt for inward-oriented trade policies such as protectionism. On the contrary, countries should still pursue outward-oriented, liberalized trade policies because once the recovery starts, countries with more open trade regimes can be expected to return to robust growth quickly. Furthermore, trade policies aimed at protecting domestic industries are likely to result in unexpected consequences that ultimately damage those industries by triggering retaliation from trading partners, which in turn reduces export opportunities for all countries. This is what happened during the tariff wars between World War I and World War II.
HIDDEN PROTECTIONISM
Since the outbreak of the global recession, a variety of trade-restricting and distorting measures, mostly of a protectionist nature, have been introduced. They include tariff increases, import quotas, product standards and trade remedy measures such as anti-dumping initiatives and countervailing-duty investigations. In addition to these rather obvious protectionist steps, “hidden” or so-called “murky” protectionist measures have been adopted by a number of countries that give preference to local companies over foreign firms in government procurement, provision of public loans and other areas.
While the number of such actions that are outright violations of WTO rules is rather small, they are still problematic because they exacerbate economic recession by discouraging trade. They manage to fly below the WTO radar for two reasons. One is because it is not always clear when these rules are introduced or what they entail, since governments often do not provide information in a timely and/or transparent manner. For example, very often it is difficult for foreign companies to obtain detailed information on newly introduced product standards. This lack of transparency means it is often difficult to determine whether a new regulation is, in fact, a violation of WTO rules. Second, some protectionist measures may not even violate WTO rules, but are nevertheless protectionist in their impact. A case in point is the difference between what, in WTO parlance, is called the “applied tariff rate” and the “concession (or bound) tariff rate.” The former is the tariff rate a country actually applies to imports, while the latter is the maximum rate a country can apply under WTO rules. An increase in the concession rate is a violation of WTO rules, but an increase in the applied rate is not, so long as it is below the concession rate. Having said that, an increase in the applied rate, though not a violation of the rules, nevertheless represents an increase in protectionism.
Table 1 shows the trade-related measures adopted by various countries since September 2008. Many of them have been reported to the WTO by the countries that adopted the measures, while some have been reported by others and verified by the WTO. Since the first G-20 meeting late last year, two WTO reports containing information on trade-related measures have been released. The first, which was released on April 14 this year, contains cases from September 2008 to March 2009, while the second report, released on July 13, contains cases from March 2009 to June 2009.
According to Table 1, countries have adopted not only protection measures, but also liberalization measures on both imports and exports. The number of import protection and liberalization measures adopted between September 2008 and June 2009 amounted to 110 and 32, respectively. Import protection measures have apparently been introduced to protect domestic industries from import competition, while import liberalization measures appear to have been adopted to lower the cost of imported materials used for domestic production. The number of cases seems to have increased over time, with the average number of import protection and liberalization measures per month going up from 10 and 2 to 12 and 5, respectively. The countries that have adopted relatively large numbers of import protection measures for the period under study include India (16), the EU (13), Argentina, Russia, the US (9), Canada, China and Indonesia (7). Russia tops the list of countries introducing import liberalization measures.
Compared to import regulations, the number of export measures — restrictions, liberalization and promotion — adopted by the countries listed in Table 1 is significantly smaller — just 6, 7 and 13, respectively. Export restrictions mainly took the form of export taxes, while liberalization came in the form of a reduction or elimination of export taxes. Since export taxes discourage exports, the motive behind such measures is not clear. The objective of liberalization of export taxes seems to be to promote exports, which would in turn promote production. Several countries have adopted export promotion measures, with the EU and China particularly active.
COMBATING BARRIERS TO TRADE
At the first meeting of G-20 leaders in Washington, DC on November 5, 2008, the heads of state underscored the importance of rejecting protectionism in the face of the global economic downturn and declared they would refrain from raising new barriers to investment or trade, imposing new export restrictions or implementing measures that were inconsistent with WTO rules.1 A similar declaration was made at the APEC leaders’ meeting November 22-23. At the second G-20 meeting in London on April 2, the leaders reiterated the importance of maintaining an open trade and investment environment by pledging to reject protectionism. Most recently, the G-8 Leaders reconfirmed their commitment to keep markets open and free and to reject protectionism in their declaration at a summit in L’Aquila, Italy on July 8.2
Despite these declarations, the number of protectionist measures adopted by G-20 members and others has continued to increase. There are several possible ways to deal with this in order to avoid further worsening of the trading environment, with all of the attendant undesirable consequences.
First, a formal standstill in the adoption of protectionist measures is needed but cannot be achieved without effective monitoring. Ideally, violations should be brought to the WTO’s Dispute Settlement Mechanism to roll back the measures. However, there is a potential obstacle: many protectionist measures adopted recently do not violate WTO rules, as I mentioned earlier. G-20 meetings, however, can be used to deal with many of these newly introduced protectionist measures by providing peer pressure, with leaders, or trade ministers, conducting hearings to question the basis for protectionist actions already in place. It is imperative that a standstill last until the global economy recovers to the pre-crisis level.
Second, WTO members should work hard to get the Doha Development Agenda back on track and to conclude the negotiations. In these negotiations, it is important not only to cut tariffs but also to reduce concession rates to the level of applied rates, so that this one type of murky protectionism can no longer be used. Sadly, though, WTO members may have to wait until the global economy recovers before resuming the Doha negotiations.
Third, East Asian countries should establish a free trade area with the aim of achieving a free flow of goods, services and investment. While a free trade area is inherently discriminatory to non-members, the threat of this kind of discrimination can be minimized if the level of protection against non-members is minimized. The experiences of existing FTAs to date show that they promote overall free trade (i.e. not only partial liberalization among FTA members but also in relation to non-members) by reducing resistance to import liberalization. It is important to keep the process of trade liberalization moving regardless of the form it takes — unilateral, bilateral, regional or global. In order to establish a regional FTA, East Asian leaders need to agree on the importance of such a trading framework, and this will require political leadership.
Shujiro Urata is Professor of Economics at Waseda University in Tokyo. He previously served as Research Associate at the Brookings Institution and as an economist at the World Bank.
Prepared for presentation at the 5th Jeju Peace Forum, August 11–13, 2009.
1 Declaration: Summit on Financial Markets and the World Economy, November 15, 2008, paragraph 13.
2 www.g8italia2009.it/static/G8_Allegato/G8_Declaration_08_07_09_final,0.pdf
|
|
|
|
|
|
|
|
Printed Version]
