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Can the Great Recession save Doha?

July 17, 2009

Christopher Swann is a Reuters columnist. The views expressed are his own –

NEW YORK, July 17 (Reuters) – At times the talks aimed at a new global trade agreement have seemed about as likely to succeed as the Arab-Israeli peace process. The Great Recession should have made the outlook still bleaker. History is replete with examples of governments shielding home-grown enterprise from foreign competitors during economic emergencies.

But this recession looks different. The mini-miracle of the downturn has been the relative paucity of protectionism. A hopeful case can be made that the headlong plunge of the global economy may actually strengthen the global trading system — exactly the opposite of the experience of the 1930s and 1980s. We may even be seeing fresh signs of life in the once moribund talks known as the Doha Round.

Trade itself has been among the biggest casualties of the downturn. In the first three months of this year, trade volumes fell by almost a third — the fastest contraction since the 1930s. Remarkably the global trading system, however, is holding up extremely well. Backsliding on global trade rules has been surprisingly rare.

A few brave souls have even been liberalizing. Close to the peak of financial panic in January, the Mexican government unilaterally reduced tariffs on 8,000 items from 20 different industrial sectors. A month later Brazil suspended tariffs entirely on some capital goods and cut duties on machinery, capital equipment and information technology. The Association of Southeast Asian Nations has agreed to reduce and eliminate tariffs on 96 percent of all goods by 2020.

It is often forgotten that most developing countries have plenty of legal room for protectionism. Since the Uruguay Trade Round, most countries have liberalized trade — leaving their tariffs far below the legally permissible “bound” rate monitored by the World Trade Organization. India, for example, could more than triple its tariffs to 50 percent before it risked breaching international trade rules. Thankfully, they have chosen not to do so. Such restraint should not be totally taken for granted.

What protectionism we have seen has been surreptitious, rarely flouting WTO rules. A World Bank report in March chastised G20 nations for covert protectionism. Much of this, however, consisted of subsidies to ailing industries — certainly regrettable but perhaps a more venial sin in a steep downturn. Global trade rules have proved remarkably robust, says Gary Hufbauer, a trade specialist at the Peterson Institute. “About 98 percent of protectionism has been WTO legal,” he told me in a recent telephone conversation.

Restraint is certain to be tested as unemployment rates worldwide start to climb. Yet it is the synchronized nature of the recession that may in itself help to ward off a more serious bout of protectionism. When the United States dived into recession in the 1980s this did not stop the relentless competitive onslaught from Japanese automakers. The result was the hasty erection of trade barriers. Now protectionists are struggling to point to import surges that are threatening domestic companies. U.S. imports are down 32 percent so far this year.

The good news for the Doha process is that politicians worldwide are lowering their sights. Part of the problem for Doha was that western farmers were demanding greater market access in order to sacrifice lavish subsidies. To make any real cuts in tariffs, many developing nations would need to accept sharp reductions in their maximum “bound” rate.
The rich nations gave little value to the unilateral reductions that had been made over the years by their less developed brethren. Between 1983 and 2005, two thirds of trade liberalization in developing countries has been unilateral, according to a World Bank study. Today, locking in these existing gains no longer seems quite such a meager outcome. Fear that economic woes might tempt nations to move toward their bound rates is a powerful motivator, WTO officials say.

Trade volumes may have collapsed. But the trading system itself may be the most unlikely beneficiary of the Great Recession.

(Editing by Martin Langfield)

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