The next round of trade protection

Will there be one? You bet! The only questions are: how soon and how big?

With employment numbers in both industrialized and industrializing countries falling, world markets seizing up as a consequence of the credit squeeze, icons of globalization like Dubai bleeding debt (and emigrants) and governments rushing out 'stimulus' packages to prop up domestic demand, the scene is set for some un-neighborly action at every international border. Never mind that some of these "negatives" are likely to be part of the creative destruction that brings new ideas, new market entrants and, eventually, new growth.

Because this is not the ninteen-thirties, governments may prove wiser, more transparent and more cautious about the risks of strangling globalization's golden goose than they were in past recessions. But the more established firms that go bust, the more workers and retirees that are tossed onto the street, the bigger the stocks of unsold produce—the greater the pressure on governments to prevent stimulus spending from leaking to foreigners.

So what are we likely to see? New forms of trade protection for a new era of global recession?

The nature of the protection could be different this time. But my guess is that the old forms will still prevail. It's true that members of WTO (almost all governments) have less room to manipulate entry to markets today than they had during the 1980s downturns. This could see them adopt more sophisticated protection, in the sense of being harder to see, not based on traditional border regulations and highly discretionary so the barriers can be raised or lowered as needed.

But there is still sufficient wiggle-room in the WTO obligations of many governments to allow them to rely on some of the old stand-by methods. In this post and the next, I will outline five easy options, in ascending order of likelihood, for 'wiggle-room' protection.

1. Tariffs and services barriers

Tariff increases and new services barriers are still on the cards for the developing countries that make up three-quarters of the WTO membership. Governments in India, Africa and Latin America, especially (less in East Asia; not at all in China) have ample room to raise tariff protection on goods without consultation or retaliation under their WTO contracts. This wiggle-room—known as 'water in the tariff' or sometimes 'binding overhang'—is available because the rates of duty these governments bound in their WTO contracts are much higher than the rates of duty they currently apply. They can increase protection without breaching the contract. But several of these countries (India, not so much) also have 'free trade agreements' (FTAs) outside of WTO that restrain them from raising applied levels of duty on imports from their most important trading partners.

Few developing countries have broad obligations to maintain open services markets under the GATS. Industrialized countries have more extensive obligations; although, mostly, they have agreed not to cut back on services market access that they already permitted in the mid-1990s. Many of the obligations have, in any case, been made redundant by technical and commercial changes in fast evolving markets such as telecommunications and banking. No country has accepted meaningful obligations to free-up the movement of workers. Some industrialized countries have wide-ranging and effective FTAs in services; but almost no developing country does.

Bottom line: tariff increases are an option for developing countries, but offer limited flexibility. All governments have some flexibility to cut back on entry to services markets, but it is questionable whether there is much demand for restrictions on finance, or telecomms, or transport flows.

2. Subsidies

Subsidies to production of manufactures or subsidies on export for agriculture remain an option for the richest countries, as the EC showed recently when it restored the subsidies on milk-products. Most of the world, however, cannot afford this. Those governments that are throwing around buckets of cash in the name of macro-economic 'stimulus' will be trying to keep consumption humming along, not inflating market-prices to higher levels, as the EC does in agriculture.

EC Agriculture Commissioner, Marion Fischer Boel, says that the new subsidies are a "temporary response to an exceptional situation" and not a return to the "bad old days of CAP protectionism". Who is she kidding? If it quacks, it's a duck. Brussels has, in effect, reassured it's farmers that it will happily pay to export unemployment and recession (to developing countries, especially).

With some contortions in the form of the payments governments can inject funds into big manufacturing companies without exposing themselves to WTO challenge (vehicle makers, for example, are now being 'bailed-out' one way or another in a half-dozen economies). But payments that support exports of manufactures are a clear breach of WTO rules. So, apart from tit-for-tat action on farm products by the EC and USA—who are about equally prone to spend on farmers—I doubt we face the danger of a subsidy war.

More likely are a lot of almost-actionable subsidies for ailing manufacturers that will distort international competition, waste stimulus funds, and slow-down the innovation we would normally expect from the creative destruction of the business cycle. An actionable subsidy is one that is not prohibited by WTO rules but can lead to a dispute if either exporters or import-competing firms in other countries can demonstrate that it harms their business.

3. Safeguards

The protectionist's favorite, without doubt. It was the first weapon George Bush Jr. reached for when he began his Presidency. It remains the most likely action because it is superficially compatible with GATT. Article XIX was re-configured in the mid-1990s to suit 'adjustment' protection for industries hurt by an 'unforeseen' surge in imports (problem for GWB was that the U.S. steel protection was threatened by un-competitiveness, not by a surge in imports). But Article XIX safeguards are old-fashioned and inconvenient. There are other safeguard actions built-in to WTO agreements that are stealthier and deadlier.

The sneakiest of the lot was the special textile safeguard that was agreed between China the USA and EC when China joined WTO in 2001. For all other WTO members, all quotas on textiles were terminated on 31 December 2004, but there was safeguard mechanism was left in place until the end of 2008 permitting WTO Member Governments to take action to curb imports in case of market disruptions caused by Chinese exports of textile products. So they're over? Maybe not. According to the editor of Textile World newsletter:

"Washington and the European Union set quotas to restrict Chinese-made textiles and garments in 2005 [see this post: PWG], claiming the lapse of previous global restrictions was giving way to a surge of cheap products from China that threatened Western manufacturers. Those agreements with China lapsed at the end of 2008. And now, in these rough times caused by the global economic slowdown, some US and EU industry groups have called for new limits or quotas."

More to come in the next post…

Tags for this entry: trade policy protection subsidies anti-dumping services surveillance gatt buy-local gats