In this column, I will focus on how the potential misuse of trade remedy measures, legal under the World Trade Organization (WTO) rules, that are aimed at dealing with either “unfair” trade practices or import surges could get out of hand and result in a catastrophic protectionist spiral. That would hinder the start of world trade recovery, expected next year, which in turn would prolong the global economic crisis.
The WTO last week published its 196-page flagship “World Trade Report 2009,” which contains an analysis of global trade developments during 2008-2009. Its results can be summarized as follows: (1) World merchandise trade grew in real terms in 2008 by 2 percent, down from 6 percent in 2007, and below the average annual 5.7 percent between 1998 to 2008, but still better than world gross domestic product (GDP), which grew by 1.7 percent in 2008, down from 3.5 percent in 2007. When world GDP growth accelerates, world trade grows even faster, but when world GDP growth decelerates, world trade slows. The WTO expects world merchandise trade to contract for the first time since 1982 by 10 percent in 2009. (2) Europe's export growth in 2008, just 0.5 percent, down from 4 percent in 2007, was the slowest of any region. Its import growth was negative 1 percent. (3) In 2008, Turkey's imports, which grew by 19 percent, accounted for 1.6 percent of world imports and ranked 13th in the world, excluding intra-EU trade. Turkey's exports, which grew by 23 percent, accounted for 1.1 percent of world exports and ranked 22nd in the world, excluding intra-EU trade.
Each year the WTR has a centerpiece topic. This year's topic is titled “Trade Policy Commitments and Contingency Measures,” applied primarily to goods trade. Most of the WTR focuses on how “contingency trade measures” are designed and used and how they affect international trade agreements and flows. Contingency trade measures, also called “contingent protectionism,” refer to unilateral safety valves or escape clauses in the multilateral trading system (MTS) used to cope with specific, unexpected market situations or emergencies as temporary deviations from preexisting commitments in international trade agreements. These trade remedies -- as a type of insurance against or instruments of economic adjustment to either economic or non-economic shocks -- allow governments to accept deeper and faster trade liberalization than they would otherwise since they know that they can pull back from their commitments temporarily in specific unforeseen market situations or emergencies. Narrowly defined contingency measures, which can also deter unfair trade practices, consist of antidumping duties against imports allegedly “dumped” (sold below “normal” or “fair market value”), countervailing (anti-subsidy) duties to offset imports allegedly subsidized by exporter's government and safeguards (as tariffs or quotas) against import surges. Antidumping and countervailing duties are aimed at neutralizing “unfair” trade practices in cases of “material injury” to domestic producers. Safeguards, expected to be applied normally on a Most Favored Nation (MFN) basis, i.e., without discriminating among a country's trading partners, are aimed providing adjustment by domestic producers to import surges in cases of “serious injury,” exceeding “material injury”. They require compensation to foreign producers adversely affected by them. Broadly defined contingency measures include renegotiating tariff commitments, increasing tariffs from their applied levels to their legal ceilings (tariff bindings) and imposing export taxes.
The “World Trade Report 2009” identifies some interesting sectoral and national patterns in the past practice of contingency measures. (1) Antidumping duties, which do not require compensation, can be applied on a non-MFN basis and can be extended multiple times under sunset reviews. They are by the dominant form of contingent protectionism. (2) Accordingly, most of the empirical evidence about and the analysis on contingent protectionism concerns antidumping duties. (3) Two industries, chemicals and steel, have been the subject of contingent protectionism more than other industries. (4) Although developed countries have used countervailing duties more than developing countries, the latter have emerged in recent years as the dominant users of all other types of contingent protectionism, i.e., antidumping duties, safeguards, tariff renegotiations, tariff increases within bindings and export taxes. (5) Empirical research suggests to a limited extent that narrowly defined contingent protectionism, i.e., antidumping and countervailing duties as well as safeguards, as a quid pro quo, has enabled and facilitated countries to further trade liberalization. (6) The use of narrowly defined contingent protectionism, which has costs as well as benefits and varies significantly among countries, is explained largely by the downward phases of the business cycle, the real exchange rate changes and industry-specific factors.
The challenge for the MTS is how to balance, especially in a severe economic crisis, the flexibility enabled by contingency trade measures with the existing commitments in international trade agreements. Contingency trade measures have to be well designed and flexible enough to serve their purpose effectively for a limited time but not too broad and flexible to damage the integrity and stability of the MTS, which requires credible commitments. In the current global crisis, the danger is that WTO members will resort to excessive and irresponsible use of contingent measures, not for specific unexpected market situations but to fight rising overall unemployment or to retaliate aggressively against other countries' contingency measures, leading to a beggar-thy-neighbor protectionist spiral that feeds on itself. As WTO Director-General Pascal Lamy writes in the “World Trade Report 2009” foreword, “Experience tells us that while restrictive trade policies are not necessarily the root cause of episodes of economic downturn -- they were not the trigger for the Great Depression -- a protectionist response to the pain of contraction is a recipe for deepening and prolonging an economic crisis.” In its conclusion, the “World Trade Report 2009” warns that although contingent protectionism is legal under the WTO and its use can be beneficial in sustaining the MTS in the absence of a global economic crisis, its reckless use can deepen and prolong the current crisis. Next week, in considering the evidence from the WTO and other sources as to whether we are facing such reckless use of contingent protectionism, I will discuss recent contingent protectionism by Turkey and by other countries against Turkey.
