A new report by the World Trade Organisation suggests that countries are increasingly turning to protectionist measures. Rita Lobo looks at how governments are using red-tape measures to keep commerce domiciled
Over the past year, the World Trade Organisation (WTO) has recorded over 500 cases of potential curbs instilled by governments to protect domestic trade and limit imports.
Though there has been much debate about countries like China turning to protectionist measures with unabashed enthusiasm, it might come as a bit of a surprise that emerging economies in Latin America like Brazil and Argentina have been resorting to increasingly stringent measures to protect their national interests.
After issuing stark warnings about the pitfalls of protectionism in October 2011, the WTO has been monitoring the dramatic increase in the number of such measures being passed by individual countries and trade blocs. After extensive investigation the organisation concluded that despite much finger-wagging and debate, most of the G20 countries had in fact increased the number of measures they had in place. The organisation cites the global economic downturn as the main factor for countries turning to these kind of measures, and is quick to point out the many dangers of protectionism and all the evil that it can unleash onto the markets, but it has so far been unsuccessful in dissuading governments from legislating.
The G20 first pledged to the WTO that they would halt any potential protectionist measures being passed in November 2008, at the height of the financial crisis. Back then, leaders vowed to refrain from putting in place any new trade barriers that might shield domestic businesses from world competition during times of economic stress. Despite this promise the WTO report has found that the G20 nations are by far the worst offenders when it comes to putting up new trade barriers, commanding the majority share of the over 1,000 new protectionist measures that were passed between November 2008 and March 2012.
“The latest report by the WTO is quite alarming because there is a rise of protectionism and no country is immune” said IMF Managing Director Christine Lagarde at a business forum in Jakarta. Data released for the month of June shows that the growth rate for imports worldwide has decelerated sharply month-on-month to 6.3 percent. Export growth also declined from 15.3 percent in May to 11.3 percent. The rise in the number of protectionist measures is a bigger issue than ever, as global trade slows dangerously.
Ahead of a recent G20 summit in Los Cabos, Mexico, world leaders were vociferous in their warnings of the pitfalls protectionism can lead to. “The EU is sounding the alarm regarding a worrisome rise in protectionism,” said EU President José Manuel Barroso. Japan’s Prime Minister Yoshihiko Noda was adamant that world leaders must take action now against this rising threat. “I see signs of protectionism emerging in the G20 debate, so we should deliver a message to counter that,” he said.
Calling the kettle black
China has been on the receiving end of a series of anti-dumping taxes from a variety of different countries. First, the US slapped additional tariffs on Chinese made solar panels, which it claimed were being marketed at unfairly low prices in American markets. Then the down-trodden Chinese manufacturers faced similar measures from the Brazilians, who imposed additional charges in excess of 18 percent on all rubber shoe soles imported from China. These measures have led Wan Jifei, China’s top promoter of foreign trade to make a speech he can’t have been used to making; accusing other countries of suppressing trade.
“Trade protectionism is short-sighted and narrow-minded,” he said, “and it cannot fundamentally address the problems of unemployment and economic growth worldwide.” Wan, who is President of the China Council for the Promotion of International Trade, was praised and supported by Chinese President Hu Jintao, for his initiatives in combating the evils of protectionism.
On the other side of the see-saw, the US, together with the EU and Japan, has been accusing China of adding disproportionate tariffs on sport utility, midsize and large cars.
Though this particular rift has been going on since 2009, the complainants have only recently brought the charges before the WTO. In December, China imposed anti-dumping and anti-subsidy tariffs that amount to 22 percent on American-made sports vehicles and cars with larger engines. However, US President Obama, plagued by the slow decline in unemployment, has also been turning his hand to protectionism. On the top of his ‘Congress to-do list’ is a call to reward American jobs in which he urges legislators to pass a 20 percent tax credit for American companies bringing back jobs from overseas, to be paid for by scrapping a totally inexplicable tax incentive offered to companies moving their business abroad. The bill was killed in the Senate after it fell only four votes short of overcoming a filibuster. Despite the bill’s failure, the impetus is still there; outsourcing and protectionism have become political hot-potatoes in the US presidential elections this year.
But the rampant hypocrisy is not limited to the oft-strained Sino-American business relationships. In fact, the topic has been grabbing headlines across Europe, particularly since the election of Socialist François Hollande in France. When it was revealed that around 80 percent of the French electorate had anti-globalisation tendencies, all candidates in the presidential race upped their protectionist rhetoric. Hollande won with the vow to increase financial aid to exporters of French products and a lot of other protectionist promises. It seems to have escaped the President’s attention that French companies employ six million people outside of France and account for around one fifth of all investment in Europe. French investment abroad has reached twice the size of foreign investment in France, according to studies by the Trésor-Economie, the French Treasury and the Directorate-General for Economic and Financial Affairs.
It seems that the French government is also suffering from a severe case of ‘do-as-I-say-not-as-I-do’, like American and Chinese officials before them. When Russia instituted a blanket ban on all livestock from Europe in March over concerns of a Schmallenberg Virus infection, France protested, along with the rest of Europe. The risk of an outbreak has long passed, but Russia kept the ban firmly in place.
New players in the pecking order
It has been rumoured that July will bring the most anticipated union in the history of trade organisations, where Russia will finally join the WTO after 19 years of flirtation. Though with legislation that favours domestic automobiles in government procurement programmes still firmly in place, it is hard not to wonder if Russia has not missed the point somewhat. In its latest report, the WTO fingered Russia as the second most prolific protectionist measure legislator after Argentina. During 2011-12, Russia instilled 55 new border barriers, five import restrictions and 23 other types of measures to restrict foreign trade.
At the G20 summit in Los Cabos, where the rise in protectionist measures was amply – if not fruitfully – discussed, a group of nations extended their commitment to not pass any further measures until the end of 2014, as part of a joint commitment to boost global growth. “There was resistance from some countries but beyond that we did manage to get a consensus and arrive at an agreement,” Luiz Felipe Calderon, Mexico’s President told a press conference after the agreement had been reached. It seems that Brazil, Argentina and South Africa did not want to extend their commitments beyond the previous expiry date at the end of 2013.
Argentina has been the supreme ruler when it comes to restricting trade. President Christina Kirchner (née Fernandez), has been leading the way to Latin American protectionism. Brazil and Argentina are the most economically powerful countries in the Mercosur trading bloc, and Fernandez has been looking to make those links even more binding by proposing that the bloc raise the tariffs of non-Mercosur (plus Mexico) imports to 35 percent from the current 10 percent, the highest authorised by the WTO rules. In an attempt to boost Argentinean exports within the region, the embattled president is also urging its neighbour to lift certain trade restrictions aimed at pharmaceuticals and citrus fruits. But Brazil is not the only country on the receiving end of Fernandez’s demands, according to the WTO; Argentina approved 119 potential curbs to trade in 2011-12, 108 of those border barriers.
Because its trading partners have resisted Argentina’s moves, Fernandez has been forced to come up with increasingly creative forms of restricting the flow of imports and exports across its border. She has instituted copious amounts of bureaucratic and insurmountable red-tape, including a demand for all companies wishing to export goods into the country apply for a special license which may or may not be granted promptly and adequately.
Latin America is identified in the WTO report as a hotspot for protectionism. Brazil has also set many tongues wagging with its recent dive into the area. In March, Finance Minister Guido Mantega forced Mexico, a long-term trading partner, to renegotiate the terms of a long-standing agreement regarding the import and export of vehicles. It seems that as Brazil’s economic muscles grew over the last 10 years, so too did its need to flex them. The minister has also been busy passing a stringent local content rule that will apply to the oil industry, raising taxes on imported cars. Brazil is being accused of a far more serious charge: currency manipulation. Mantega has strived to keep the real from appreciating against the dollar, after it reached a high in 2011 that damaged the country’s profitable export sector. “While the advanced countries and those of Asia are continuing to manipulate their exchange rates, we will also intervene to keep the real at a level that will permit the survival of Brazilian industry,” Mantega said.
Brazil and Argentina have been anything but conspicuous in their move towards protectionism and the WTO is concerned. Both nations maintain that their measures are necessary to protect the local economy from European woes but use nationalist rhetoric to sway voters in their favour. Mantega insists that Brazil’s measures are ‘defensive’ rather than ‘protectionist’, but at this point it is getting hard to tell the difference.
The market responds
One main issue being highlighted by the experts in the wake of the WTO report is that the playing field is less levelled than ever. The Indian market is notoriously restrictive of foreign firms. The latest example came last year as a series of multinational supermarket chains tried and failed to open branches in the country. In a recent u-turn it was determined that single-brand chains like Ikea and Starbucks Coffee can now open stores in India, provided they purchase at least 30 percent of their stocks locally, a move that will certainly dissuade some companies from setting up shop in the country.
The reverse is true for countries like the UK, who have over the years found some of their most traditional brands, like Jaguar Land Rover and Cadbury’s falling into foreign hands. Though when British companies seek to branch out overseas, for example Tesco’s attempt at settling in India, they often find their expansionist dreams quashed by various protectionist and red-tape measures. A worrying trend observed by the WTO is that countries have been resorting to piling on the bureaucracy and red-tape in an attempt to flout WTO rules. High tariffs and taxes are often easy to spot; red tape is not. And in an increasingly delicate market, any form of restriction or complication is likely to dissuade companies from setting up shop in one country or another, but it is exactly these fragile markets that make the need to broaden their reach even more crucial for successful companies.
So it seems that the G20 nations have collectively not been practising what they preach. Experts have pointed to the financial crisis of 2008 as the source of this recent wave of protectionist measures, as countries struggle to safeguard their economies in the face of the storm. According to the WTO, trade barriers have not been this high since the Great Depression in the 1930s. Governments have been justifying rising levels as short-term solutions for problems created by the economic crisis, not as long-term measures. After all, it is easy to justify subsidies to a hard-hit export sector in the face of the global economic downturn. But the WTO is worried that protectionist measures might be easier to put in place than to remove.
The organisation is also not buying any excuses. Many of the measures still being enforced today were planned or passed before the crisis hit in 2008, particularly in the agricultural sector. They are also worried that such a proliferation of measures is stifling an already stressed global market and thus slowing down recovery. The WTO’s discourse is clear: protectionism is bad for business. Ken Ash, the OECD Trade and Agriculture Director does not hesitate to say that “if there is a return to trade protectionist type measures then we can expect trade performance to decline further.”
For the WTO, no good can come of any form of protectionism. The OECD, which recently co-authored another report with the WTO on the effects of protectionism, also claims that “open markets help countries to use their resources, human and physical, in the most efficient way, thus concentrating their production where it is most competitive.” A recent IMF study estimates that trade restrictions reduce global trade by at least 0.2 percent annually. Though this might seem like a fairly inconsequential percentage, it amounts to $30-35bn of trade lost annually. “The fact that this figure is not much larger is due to the restraint that countries have shown – since the measures themselves have had strong and harmful effects at the product level,” says the report, “the current global economic recovery could be aided by removing crisis protectionist measures so as to not perpetuate the associated trade loss.”
Protectionism or blind patriotism?
As recession endures in Europe, and recovery slows down in the US, global trade is taken with fears of enduring crisis, putting pressure on governments to favour domestic markets in an attempt to keep jobs and money at home. Not since the Great Depression has the world seen such a rise in protectionist measures, though the rush this time has been nowhere near as intense or damaging as in the 1930s. It is clear that many developed economies are missing out as they throw their barriers wide open only to be met with locked doors abroad. It is not a surprise that the US has launched their ‘Buy American’ campaign and that Latin American countries are looking to boost trade within their region.
It might be that the real issue at hand is a lack of consistency in politics and policy. By undermining the WTO, which countries have joined electively, they are not only crippling the organisation but damaging international trade relations. But by abiding to their rules when so many don’t means that WTO countries miss out. Protectionism doesn’t have to be as extreme and damaging as it was in the 1930s. A certain measure of protectionism can help boost domestic employment, and reverse the course of recession. But there is a fine line to be treaded.
Douglas Irwin, an American expert on protectionist measures of the 1930s thinks that for now it is hard to say what the effects of this new wave of actions will have on global trade flows. But he warns: “The longer that economic weakness endures, the more trade restrictions become a permanent part of the environment. The lesion of the Depression is that, once in place, restrictions become increasingly difficult to reverse.”