Protectionism risks rise in 2009-2010

January 8, 2009

John Kemp Great Debate– John Kemp is a Reuters columnist. The opinions expressed are his own –

Commentators are focused on the risk countries will respond to the worldwide slump in demand by resorting to protectionist measures (either competitive devaluations, tariff rises or other trade barriers) in a mutually self-defeating attempt to reserve what remains of shrinking demand for domestic industries — leading to trade wars, a reversal in the trend towards global integration and a fall in living standards.

Parallels with the 1930s abound. But the tariff wars of the 1930s belong to a vanished world of fixed exchange rates, militarism and failed multilateralism. The tariff history of the 1930s is not a good parallel for today’s world.

The real risk is a more insidious undeclared trade conflict based on rises in applied rates, non-tariff barriers, bad faith, and an upsurge in trade defenses as countries try to “allocate” scarce demand and placate industries and workers under particular pressure.

RAISING APPLIED TARIFF RATES

Each WTO member has a schedule of commitments in which it has agreed to “bind” the duty levied on particular items at no more than a specified rate.

The tariff binding is a maximum; applied rates are often below it, in some cases by a substantial margin. The differential between applied rates and bound rates is a measure of how far countries could raise their tariffs in practice without violating their WTO commitments.

Advanced economies generally have very low bindings on most tariff items (no more than 0-5 percent) so the risk is not high. But emerging economies often have relatively high bound rates and actually apply rates at considerably lower levels so they have scope to raise tariffs within the WTO framework.

The risk is greater for long-standing members of the GATT (such as India) or relatively unimportant countries in the trading system, since they did not start to come under pressure to bring them down as part of multilateral negotiations until the 1970s and 1980s and still have relatively high bindings.

There is less risk for new members, such as China, because other WTO members drove hard bargains during the accession negotiations during the 1990s, and bindings usually cover a much wider range of items at lower levels.

RAISING NON-TARIFF BARRIERS

The WTO agreements go to great lengths to restrict the use of health, safety and other technical standards to ensure they are not used as covert trade barriers.

But this is a complex and very grey area. It is made harder because the WTO agreements try to enforce free trade while respecting the right of states to take measures to protect their own citizens. So the controls on health, safety and technical regulations give states considerable discretion in how these measures are applied, which opens the scope for abuse.

Lobbies for domestic producers are skilled at proposing government regulations which appear to be neutral in theory between the domestic industry and importers but which discriminate in practice.

BREAKDOWN OF GOOD FAITH

The WTO system relies to a considerable extent on the good-faith of its member countries. Treaties are concluded between sovereign entities so they differ from ordinary private contracts particularly in their enforcement mechanisms. In general, states are assumed to be honor bound to observe their obligations and do nothing to undermine the spirit or operation of the treaty.

Most treaties do contain some arbitral mechanism for settling disputes, but it is often quite a weak one.

Crucially, the powers of the arbitral mechanism are usually limited. States may be ordered to comply with the arbitral decision and change their behavior in future, but treaties do not usually provide for retroactive compensation for non-performance of obligations.

The WTO has one of the most elaborate dispute settlement systems in international law, which is often held up as a model for other treaties. But the system suffers from the same drawbacks as others.

The WTO provides a fixed and fairly tough timetable for settling disputes (and hearing appeals) designed to prevent parties spinning out the proceedings. Even so, it can take 2-3 years to obtain a definitive ruling. Once the ruling is definitive, the defaulting state is given a grace period to come into compliance.

Only if it fails, are “sanctions” applied. But such sanctions are prospective (affecting future trade). There is no retroactive compensation for any trade lost during the previous period of non-compliance.

The system is vulnerable to being “gamed”. A dishonest state might introduce trade restrictions (especially non-tariff barriers or trade defences) that it knows or suspects will be found non-compliant, knowing it can gain the benefit of the added protection for 2-3 years before having to change, and suffer no penalty for the benefit it has dishonestly obtained.

Has this ever happened? Trade lawyers are paid very large sums of money to come up with convincing arguments for all sorts of protective measures designed to make them seem WTO compliant.

But there have certainly been a few instances over the last 25 years in which states have pushed the envelop and imposed measures that were highly dubious and seemed prepared to spin out the dispute settlement system to satisfy domestic audiences, knowing there would be no penalty for being found non-compliant at some future date.

So far, most countries in most cases have acted in good faith. But as trade tensions escalate, there is really nothing to prevent more countries in more disputes acting in bad faith, introducing various non-tariff barriers, gaining 2-3 years worth of protection, and worrying about whether they are WTO compliant in 2012-2013, when the crisis might hopefully be past.

INCREASED USE OF TRADE DEFENSES

WTO obligations appear to be tightly binding, but in fact the system contains a number of built in “safety valves” designed to allow countries to reintroduce higher tariffs well above the bound rates on a selective basis against imports from selected countries.

These “trade defenses” include antidumping duties, countervailing duties against foreign subsidies, and safeguard measures designed to protect domestic producers from a sudden and unforeseen surge in imports while they restructure to meet the competition.

Antidumping and countervailing duties have their origins among the major trading countries of Canada, United States, Europe and Australia before the Second World War. They were retained in the GATT/WTO and left in place through successive rounds of negotiations at the insistence of these countries, especially the United States.

US officials have often made the point that these measures serve the role of a “safety valve” within the international trading system. They help sustain a broad political consensus in favor of trade liberalisation by allowing WTO members to raise tariffs in specific cases where the pain of competition becomes too great. In this view, adherence to the general principle of trade liberalization is strengthened by allowing countries to deviate from it in individual exceptional cases.

Until the 1980s, antidumping and countervailing duty laws were used almost exclusively by the main advanced economies (United States, EU, Canada, Australia) against one another and imports from the developing world.

Antidumping and countervailing duty actions were seen as the rich world’s way to block painful imports from low-cost emerging markets, particularly those with export-led growth strategies.

But since the 1990s, many developing countries have enacted antidumping and countervailing duty statutes. The number of AD and CVD actions has been proliferating rapidly in recent years, and many actions are now launched by developing countries against one another, or even against imports from the advanced countries.

The risk is that in a downturn, with exchange rates shifting substantially and altering relative competitiveness, WTO members could increasingly resort to antidumping and countervailing duties or safeguard tariffs to offer a measure of protection to domestic producers under pressure. As with the non-tariff barriers, there may also be a temptation for countries to impose duties now and worry about proving WTO compliance later.

For previous columns by John Kemp, click here.

8 comments

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And what about interest rates used in defense of a countries global economic wellbeing. The Bank of England has announced a 50 basis point drop in their official rate rather than the expected 100 basis points. Sterling strengthens against the USD and Euro and investment fund flows are likely to be affected to the benefit of the UK.

We will learn that there are endless ways to skin this particular cat

Posted by anton kleinschmidt | Report as abusive

The swindle of “Free Trade” is finished. Among other points, the collapse of this economy proves that the USA cannot continue to transfer massive amounts of its wealth to those countries that provide slave labor and cheap manufactured goods to US corporations (to be sold domestically at outrageous prices); while depressing wages at home and creating a limited number of low paying, short lived, volatile, low skill service jobs (retail) without dire economic consequences.

Manufacturing is the ONLY generator of real wealth. The USA must force the return of its manufacturing and end H1-B visas.

Notwithstanding what the “experts” say about the “post industrial economy” and “globalization”.

Posted by RFL | Report as abusive

Bailing out Banks, the car industry etc is protectionism.

Posted by Tony | Report as abusive

Global “free” trade is a tragedy and just another mechanism to shunt money to the world’s upper classes.
Naturally, trade “wars” are a necessary part of this effort because every country wants to come out on top. This is the same reason the American Civil War was fought.
GM, Ford and Chrysler are in trouble and what are the proposed solutions? Funnel taxpayer money to them while reducing wages and benefits for the workers so the companies can compete against slave labor wages in the global market. The working class in this country hasn’t had a raise in 25+ years when adjusted for inflation but the wealthy have gotten much richer.
Meanwhile, hundreds of millions are dying of starvation, disease and “rebel” attacks all over the world which are mainly measures to control resources. Anyone who says that any trade measures or rules will stop that is a dreamer of great magnitude or a cynical, lying politician. There are simply not enough resources left on earth to bring the mass of humanity even close to the living standards of those in the U.S.
Which begs the question: “Free” trade is for whose benefit? Certainly not the middle and lower classes. Of any country.

Posted by Ray | Report as abusive

The BOP since 1998: -$4,869,669,000. I see no where in this number where the USA has benefitted from “Free Trade”. It’s a scam folks, pure and simple.

Posted by RFL | Report as abusive

In the point of fact of the balance of payments (BOP) numbers; how Mr. Kemp and all other advocates of “Free Trade” can continue to push the “benefits” of “Free Trade” on any society is ridiculous to the point of incredulity. The “Free Trade” movement must be suffering from a massive collective case of denial, mental illness. Or bought and paid for by the corporation… To be sure they are deniers of reality – kinda like believing in the Tooth Fairy…

Posted by RFL | Report as abusive

“Free Trade” has come to mean that companies are free to do elsewhere what they cannot do domestically. The only litmus test for true free trade is when an exchange of rules and laws has minimal effect on aggregate cost.

Posted by Glen | Report as abusive

Reading this column has strengthened my opposition to these global organizations. As it applies to America, we should be providing for ourselves first. We are fortunate enough in our country to have the means to do it. We can feed ourselves and manufacture goods here at home for domestic consumption. We have the resources, intelligence, and manpower to do so. We can “fix” our currency to solid commodities that WE produce here at home and make it valuable to Americans most importantly first. We once fought like heck to remove the cancer that ruled over us from abroad who would not hear our cases nor defend our standards. Who held control over both our means and our ends. Why are our own people so eager to internationally bind America to another entity? Do we (they) really fear the world that much or do we not have enough trust and faith in each other that we can do a good job? It wasn’t that long ago that we did provide for ourselves.

Posted by jason | Report as abusive