Lamy reports rise in trade protectionism

Geneva (Kanaga Raja) — There has been an increase in tariffs, new non-tariff measures, and more resort to trade defence measures such as anti-dumping actions by WTO Members since the start of this year, WTO Director-General Pascal Lamy said on Thursday.

This view was in Lamy’s second report (JOB09/30) to the Trade Policy Review Body on the financial and economic crisis and trade-related developments. His first report was issued in late January. As with the first report, the second report was issued under Lamy’s sole responsibility and, according to him, is intended to be a purely factual report.

[The report purports to be factual and in terms of Paragraph G of the Trade Policy Review Body’s mandate. That mandate asks the TPRB to conduct an annual overview, and stipulates that this is to be assisted by an “annual report” of the Director-General. At an earlier informal TPRB meeting, for which too Lamy produced a report and seemed to seek some kind of a mandate for periodic reports during the current crisis, a number of members (particularly from developing countries) had expressed some doubts about his claims to do this as part of a TPRB mandate.

[In an effort to link his current report, as the earlier one, to the TPRB exercise, Lamy has said his report is another “preparatory contribution” to the annual report of the Director-General envisaged in para G. Some trade observers saw this as a rather tenuous link, and part of the WTO culture where the secretariat does not get a clear mandate, spelling out the terms, but issues reports by linking it to one or another part of the WTO agreements.]

“The financial and fiscal stimulus packages that have been introduced to tackle the crises clearly favour the restoration of trade growth globally and they are to be welcomed, but some of them contain elements – such as state aids, other subsidies and buy/lend/invest/hire local’ conditions – that favour domestic goods and services at the expense of imports,” Lamy said in his report.

He noted that since his last report to the Trade Policy Review Body, the economic situation has continued to worsen for all WTO Members. The volume of world trade is projected now to contract sharply in 2009 by as much as 9%, driven lower by the collapse in global demand and by shortages of trade finance that have created supply-side constraints to export growth in many developing countries.

“No-one can foresee clearly how deep this recession may be, nor how long it might last, but there can be no doubt about the fragility of the world economy.”

In such circumstances, said Lamy, a large premium must be attached to avoiding policies that restrict international trade. There is no indication of an imminent descent into high intensity protectionism, involving widespread resort to trade restriction and retaliation. The multilateral trade rules built over the past 60 years continue to provide a strong defence against that happening.

The danger today is of an incremental build-up of restrictions that could slowly strangle international trade and undercut the effectiveness of policies to boost aggregate demand and restore sustained growth globally.

Many WTO Members are facing increased pressure to take protectionist actions. At the start of this year, most WTO Members appeared to have successfully kept these pressures under control. There was only limited evidence of increases in tariffs and non-tariff barriers, or of increased resort to trade-remedy actions.

“Since then, there has been significant slippage,” said Lamy, pointing out that “there have been increases in tariffs, new non-tariff measures, and more resort to trade defence measures such as anti-dumping actions.”

The incidence of new trade measures taken in response to the current crisis is not out of line so far with what happened during previous downturns in economic activity. However, trade policy risks are still increasing, said Lamy.

The main risk is that governments will continue to cede ground to protectionist pressures, even if only gradually, as long as the global economic situation continues to deteriorate. In that case, the negative impact on trade will mount as the number of new measures accumulates. This will worsen the contraction of world trade and undermine confidence in an early and sustained recovery in global economic activity.

“A collective decision by WTO Members to bring the Doha Round to a rapid conclusion would send an unambiguous signal that protectionist measures are not the solution to this crisis, and substantially narrow the scope for further trade restriction,” said Lamy.

The second risk is that measures taken “temporarily” to try to protect jobs and business profits now from the effects of the crisis will create a legacy of uncompetitive industries and sectoral over-capacity that will continue to generate protectionist pressures even after economic activity picks up again. The failure of trade restrictions and subsidies to provide effective industrial support in the 1970s and 1980s, and the long-term costs imposed on world trade until they were unwound during the Uruguay Round, need to be recalled. “The same mistakes must not be made again.”

Governments should also reflect on the contradiction of using measures that restrict or distort trade, and therefore that tax production and incomes, at the same time as the main thrust of policies to overcome the economic crisis is geared to expanding aggregate demand. “Best practice” trade policy in current circumstances, to accompany financial and fiscal stimulus, is to reduce trade restrictions so as to cut costs and prices worldwide. Where subsidies can be afforded, their full value as a stimulus for economic activity will come from targeting them at consumption, not production, with consumers free to choose internationally the goods and services that they buy.

“The market access package on industrial and agricultural goods that is on the table in the Doha Round is equivalent to a new stimulus package for consumers of over US$150 billion. Other elements of the Round, such as the very important services sector and a new Trade Facilitation agreement, could more than double that. In current circumstances, opportunities to inject an economic stimulus of this magnitude into the global economy must not be discarded lightly,” said the report.

The report goes on to provide what it calls background information on trade-related developments that have occurred since September 2008 as a result of, or in the context of, the financial and economic crises and their impact on the global economy. It highlights significant policy issues affecting the trading system.

The report noted that the global economic situation has deteriorated significantly since the last report was issued in January, with the latest data showing economies slowing worldwide and trade flows contracting sharply. Developed economies have been most affected by the downturn so far. The industrialized countries recorded -1.5% in real GDP from the third to the fourth quarter of 2008, the largest such drop since the OECD began keeping records in 1960. Japan saw the biggest reduction in output, with GDP of -3.3%, while the European Union and the United States were -1.5% and -1.0%, respectively.

World trade (average of exports and imports) in real terms declined sharply towards the end of 2008 and into 2009. According to one set of monthly estimates, the volume of world trade fell 7% in December 2008 (seasonally adjusted, month-on-month) after -5% in November. January 2009 saw a further decline of 7% month-on-month and -17% year-on-year.

“Even if trade begins to show signs of recovery in February and March, the outlook for the whole of 2009 remains bleak. The size of the contraction means that trade will be starting from a much lower level in early 2009, requiring significantly above-average growth to return to its pre-crisis level.”

There has been a marked increase in protectionist pressures globally since September 2008, driven by demands to protect domestic jobs and businesses. In a number of cases, proposals for potentially protectionist legislation have been successfully resisted or amended before being executed. In some other cases, however, governments have moved to relax legal, institutional or policy limitations on the extent to which potentially trade-restricting or distorting measures can be taken.

According to Lamy, the economic crisis has also called attention to standing legislation in the area of trade in agriculture that automatically or semi-automatically increases support to farmers whenever agricultural prices fall. This results in effects that are pre-programmed to reinforce the current contraction of trade. Examples of such measures are counter-cyclical payments and loan deficiency payments in the United States, and the recent reintroduction of export subsidies and the resumption of intervention purchases for dairy products by the European Communities.

The report also noted that some governments have taken trade liberalization and facilitation measures in the past six months, involving the reduction or elimination of import tariffs and export taxes and the expansion of trade finance facilities. More trade policy initiatives of this kind, particularly if they were to be taken collectively by the major trading countries, would make an impact on a global scale.

Some governments have reacted to the crisis by imposing new trade-restricting and distorting measures (the report lists examples in an annex). So far, there is not a general trend in that direction, but a pattern is beginning to emerge of increases in import licensing, import tariffs and surcharges and trade remedies to support industries that have faced difficulties early on in this crisis, said the report.

Reports of various kinds of non-tariff measures affecting trade, such as standards and technical regulations (including SPS measures), are also rising. It would appear for the time being that this is due less to an increase in the number of new measures than to changes in the way in which existing measures are being applied and administered.

The report also noted that there has been an increase in state aids and potentially trade-distorting subsidies in some countries to support manufacturing industries, notably the steel and automobile industries, including direct funding, special loans and guarantees. Similar measures have been used by some countries to provide support to their financial services industries.

“Using public finance in this way provides the governments that can afford it with an alternative to using border trade restrictions to protect their economies against foreign competition, but is not an option open to the vast majority of developing country Members of the WTO whose fiscal situation is being placed under even more stress than usual by the economic crisis.”

These measures can prolong the operations of uncompetitive or insolvent firms, which denies market share to more efficient producers including foreign suppliers. In some cases, the provision of state aids and subsidies is subject to specific conditions that can restrict or distort trade, such as conditions on a firm or industry’s investment (e. g. to avoid de-investing domestically), or its policies or practices for sourcing parts or labour. In some cases, governments are taking a direct management role in firms in exchange for financial participation by the State. Since conditions such as these are often attached informally, and are of a political rather than contractual nature, it is very hard to know of their existence and how they are being implemented, said the report.

As to trade remedies, the report noted that the downward trend in anti-dumping investigations registered since 2001 has come to an end, and an upward trend, which could accelerate rapidly, has started. The number of investigations increased by 27% in 2008 compared to 2007. However, the total of 207 new initiations in 2008 is still well short of the peak of 366 in 2001. The increase in initiations of anti-dumping investigations looks set to continue in 2009; a preliminary search through available sources gives an estimate of 29 new initiations up until 25 March 2009.

There is no significant trend discernible for countervailing duty actions in 2008, although there have already been three initiations of new investigations between January and 25 March 2009 (compared with six initiations for the six-month period 1 July -31 December 2008).

Safeguard actions appear also to be increasing, although not in as pronounced a way as anti-dumping actions. The total number of safeguard initiations in 2008 was 11, up from eight in 2007, but lower than 13 in 2006 and far away from the peak of 34 initiations in 2002. There have been six initiations already in 2009 (until 25 March), indicating a likelihood of increased use of safeguard measures.

The report also said that the drying up of global liquidity combined with a general re-assessment of risks by commercial banks led in the second-half of 2008 to a rise in the cost of trade finance instruments such as letters of credit, and in some cases, to serious gaps between demand and supply.

Survey-based data point to a market gap in developing countries – that is unmet demand for trade financing – of between US$100 billion and US$300 billion on an annual and roll-over basis according to trade-finance experts who met in the WTO on 18 March. The trade finance market is expected to continue to experience difficult times in 2009, the report said. –TWN Info Service on WTO and Trade Issues, 2 April 2009, Third World Network, www.twnside.org.sg