Monday, March 16, 2009

G20 Countries Lean Toward Protectionism, Despite Pledge Not To

Curbing protectionism will be a major agenda item when the leaders of the world's major economies meet April 2 at the G20 Summit in London. Nevertheless, nearly all of these countries enacted new restrictions on imports since their last meeting on November 15, despite their pledges not to do so, according to the World Bank.

Seventeen of the G20 members are among the nations that, along with the European Union (EU), implemented measures that "restrict trade at the expense of other countries," the World Banks says. Japan, Saudi Arabia and South Africa avoided new protectionist measures.

The new measures, all enacted since the last financial summit held in Washington in November, "probably had only marginal effects on trade," according to a new World Bank study. It cites the global recession and the high cost and reduced availability of trade finance as the main causes for the contraction in world trade. "Nonetheless, the trend in protection is up," says the study, titled "Trade Protection: Incipient But Worrisome Trends."

The developed countries are using a different mix of protectionist policies from developing countries. The developed G20 members - Australia, Canada, the EU, France, Germany, Italy, Japan, the United Kingdom and the United States - are relying almost entirely on industry subsidies, the World Bank says, such as massive aid to their auto industries.

The developing G20 members - Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea and Turkey - are using a mix of measures, with increased tariffs accounting for about half.

New anti-dumping cases, another form of protection, rose 15 percent last year, the bank says, and agricultural subsidies are increasing.

British Prime Minister Gordon Brown and others have said the London summit should address protectionism, but there are concerns about how well the G20 can handle the issue.

The G20 members could "elaborate on exactly why it is they should be avoiding protectionism," said Philip I. Levy, an American Enterprise Institute scholar who served as an economic policy official in the George W. Bush administration. However, he said, "it would probably fly in the face of what many governments have done."

A major deficiency in the G20 is that it will not be addressing China's policies and the imbalances they cause, said Peter Morici, a professor at the University of Maryland School of Business and a former chief economist at the U.S. International Trade Commission. "You have to deal with China," he told "Will you do it in the G20? I don't think so."

"There will be some general statements admonishing people not to engage in protectionist activities and to coordinate responses to the global crisis," Morici said. "They won't accomplish much, except that it is always good to get world leaders together."

Gary Hufbauer, a senior fellow and trade policy specialist at the Peterson Institute of International Economics, said the G20 does not have a means to admonish members that don't abide by documents they sign, such as the pledge to refrain from new protectionist measures. "If you don't have a way of calling people to account, even if it's naming and shaming, these declarations can be ignored."

In addition, protectionist steps are tolerated under World Trade Organization (WTO) rules, Hufbauer said.

"There are areas which the rules don't cover and where they allow flexibility," Hufbauer said. An example is bound tariffs, the maximum rates that WTO members agree to, which can be high for developing countries. India has applied tariff rates for manufactured goods in the 10 percent to 12 percent range, but has bound rates in the 40 percent to 60 percent range, he said. "They are not breaching any international obligation if they go up to the bound level."

The Buy American provision in the recent U.S. economic stimulus bill, which reserved some U.S. government purchases to U.S. producers, caused concern among U.S. trading partners. But it was made consistent with international trade law by allowing countries that have signed the WTO government procurement code or that have free trade agreements with the United States to participate in the Buy America program.

Hufbauer, Levy and Morici all said that the world recession is the biggest factor in the decline of trade.

U.S. imports and exports reached new highs in 2008 of $2.52 trillion and $1.84 trillion respectively, but they peaked in July and have been declining since then. The trend of purchases "is clearly down," Hufbauer said, adding that other major economies are also importing less.

In this environment, he said, protectionism "is kind of like smoke out in a dry forest - the dry forest being the recession. It could blaze up pretty quickly."

(Published by the Bureau of International Information Programs, U.S. Department of State - 14/03/2009)