The Future of Protectionism

IMGXYZ3069IMGZYXWhile protectionism posed only a limited threat during the Great Recession, it still remains a concern. Carnegie’s Uri Dadush presented the results of a new Carnegie paper, Is Protectionism Dying, by Uri Dadush, Shimelse Ali, and Rachel Odell. Daniel Griswold of the Cato Institute, Mona Haddad of the World Bank, and Gary Hufbauer of the Peterson Institute for International Economics commented on the paper. Carnegie’s Alejandro Foxley moderated. 

What Factors Mattered?

Despite a significant increase in the incidence of protectionist measures during the global financial crisis, the effect on global trade appears relatively small: global trade and investment flows recovered quickly and there was little change in the export and import trends of most frequent targets of trade-discriminatory measures—such as China—and perpetrators—including India.

• WTO Disciplines:  World Trade Organization (WTO) disciplines played an important role in curbing protectionism during the crisis, argued Dadush. For example, “buy American” provisions enacted by the United States were moderated by the need to comply with the WTO Government Procurement Agreement, which states that member countries are required to grant equally favorable access to procurement markets. Dispute Settlement Mechanisms (DSM) also played an important role in reversing some previously enacted protectionist measures. Haddad agreed that international trade disciplines mattered. Temporary protectionist measures that are allowed under the WTO—such as antidumping and countervailing duties—provided breathing space for countries to adjust under the special circumstances created by the crisis. However, Hufbauer argued that a real contribution of the WTO during the crisis should have been a conclusion of the lagging Doha trade negotiations.


• Efforts that Contained Depth and Duration of Recession: Macroeconomic policies and social safety nets mitigated the effects of the crisis and helped countries adjust without resorting to protectionism, noted Dadush. Griswold argued that flexible exchange rates, which were not available in the 1930s, allowed countries to use expansionary monetary policy to combat the recession. He added that the memory of the Depression-era Smoot-Hawley Act, which heightened the effects of the Great Depression, helped to keep protectionism in check. Haddad pointed out that China was important in absorbing the exports of other developing economies, which reduced the probability of a deeper recession. 


• National Laws and Regional Trade Agreements (RTAs): Dadush noted that a large part of world trade occurs among countries with very strong legal disciplines, such as the United States and European Union, and national laws affecting trade are often difficult to change. This created a sense of predictability and continuity for the world trade environment. Furthermore, RTAs, which now cover more than 60 percent of world trade, include effective dispute settlements that parties can use to contest violations of trade agreements, Dadush added.


• Granularity of Trade:  Dadush argued that the increased granularity of trade—manifested in the increased interest of retailers and consumers in imports, the rise of trade in components and intra-firm trade, and the reliance of Foreign Direct Investment on open trade—the political economy of protectionism shifted in favor of trade liberalization. Countries have little incentive to engage in protectionist measures, since higher trade restrictions affect a country’s capacity to consume, produce, and export. Haddad agreed that global supply chains have made it more difficult for governments to increase tariffs without harming producers in their own countries. Big businesses in the United States, which earn over half of their revenue from abroad, are also largely supporters of trade liberalization, added Griswold. Nonetheless, Hufbauer warned that multinational companies are leery of openness that could bring competition.

Protectionism During the Crisis

With protectionism far from extinct, there is no room for complacency, noted Haddad. 

• Murky Protectionism: There were over 300 murky protectionist measures during the crisis, Haddad noted. These took many forms, including government subsidies and export restraints. Newly implemented protectionist measures were disproportionally South-South, imposed by developing countries on other developing countries, often targeting a few large economies, such as China. Dadush added that large parts of global trade in services, agriculture, and manufactured imports in developing are not subject to effective binding disciplines by the WTO.


• New Protectionism: Protectionism today primarily takes the form of Non-Tariff Measures (NTMs), such as administrative barriers and sanitary regulations, said Haddad. It can be difficult to determine if a NTM is actually protectionist, but these measures can pose significant costs to affected countries, creating tariff equivalents that can reach 50 percent. Hufbauer noted the large overlaps between product safety and protectionism in some sectors, such as finance and food, which are often intentionally used to limit imports.

Future of Protectionism

While the increased granularity of trade and strong trade disciplines are likely to continue to encourage open trade, there are still causes for concern.

• Low Prospects for Liberalization: Hufbauer argued that the current atmosphere is unfavorable to further trade liberalization, since economic growth in advanced economies is likely to be slow as high levels of debt are unwound. Without trade liberalization, the rate of growth in trade is not predicted to exceed the rate of growth in GDP by a substantial margin. 


• Services: Services, which account for 60-70 percent of the global economy and could be the new frontier of trade liberalization, will be difficult to liberalize because of a large overlap between regulation and protection, warned Hufbauer. 


• South-South Protectionism: Given the strong South-South flavor of protectionism during the recent crisis and the fact that trade among developing countries is likely to increase, South-South protectionism may intensify in the future, predicted Haddad. However, as most developing economies find their place in the industrial development ladder, they will engage in less competition, which may moderate South-South protectionism.

Policy Lessons

Dadush outlined six policy implications drawn from the crisis that could help foster trade liberalization.

• Macro and Social Policies: Good trade policy depends on good macroeconomic and social policy.


• Cost of Protectionism: Due to the increased granularity of trade, the cost of protectionism has risen considerably and has become less predictable, making it a dangerous policy option.


• National Policy Making: More attention should be to be given to national policy making to build on the unilateral liberalization that is happening.


• Exploit All Mechanisms: While multilateral trade liberalization remains highly desirable, a more realistic approach maintains the momentum of change, increases the support for open trade and should include all possible mechanisms—including plurilateral, bilateral, and regional processes. 


• Trade Facilitation: The cost of moving goods is now a very large part of trade cost. Increased attention to trade facilitation will not only lower the cost of trade but also increase the vested interest in open markets.


• WTO as a Facilitator: The WTO should not just focus on multilateral trade negotiations. It must view itself as a facilitator of all of the above processes as well.