Rising protectionism threatens world economic recovery

Although world trade contracted as a result of the global crisis at a steeper rate between the second quarter of 2008 and the third quarter of 2009 than it had during the Great Depression, we were fortunate to avoid the pervasive beggar-thy-neighbor protectionism of the 1930s, which would have made things much worse. But we are not out of the woods yet when it comes to such virulent protectionism.

On May 31, the World Trade Organization (WTO) released its “Report on G-20 Trade Measures,” covering mid-October 2011 to mid-May 2012, and the Organization for Economic Cooperation and Development (OECD) and United Nations Conference on Trade and Development (UNCTAD) released their joint “Report on G-20 Investment Measures,” covering Oct. 7, 2011 to May 3, 2012. The OECD, UNCTAD and WTO also issued a joint summary report on G-20 Trade and Investment Measures. These reports were followed on June 6 by the European Union's “Report on Potentially Trade Restrictive Measures Identified in the Context of the Financial and Economic Crisis,” covering September 2011 to May 1, 2012. They all support the earlier worrisome findings of the study “Global Trade Alert (GTA): Trade Tensions Mount” edited by Professor Simon J. Evenett of the University of St. Gallen, the Swiss Institute for International Economics, and issued last November by the Center for Economic Policy Research (CEPR), an independent academic and policy research think tank based in London. The GTA report had warned last November about the accumulating threats to the world trading system since the second half of 2011.

According to the 64-page WTO report, world trade growth decelerated significantly last year, with merchandise trade volume growing by only 5 percent compared to 13.8 percent in 2010. As the world economy continues to slow down, trade growth is projected to decelerate further to 3.7 percent in 2012, far below the 5.4 percent annual average rate during the last two decades. In this year's first quarter, total merchandise trade (exports and imports) of G-7 (Canada, France, Germany, Italy, Japan, the UK and the US) and the BRICS (Brazil, Russia, India, China and South Africa) is estimated by the OECD to have increased by about 1 percent, with China's trade contracting by about 4 percent. The report reviews the main trade and trade-related developments and lists 124 new specific trade restrictions, mostly trade remedy (antidumping, countervailing and safeguards) actions, tariff increases, import licenses and customs controls, imposed by G-20 economies, including Turkey, for which 11 trade and trade-related measures are listed. It finds a worrisome inward-looking trend in some G-20 countries, as they favor import-substitution policies and national industrial planning to spur economic growth. Since expanding international trade is critical to global economic recovery, it laments the collapse of the Doha Round of multilateral trade negotiations launched in 2001. WTO Director-General Pascal Lamy in a speech last week called the WTO report “alarming,” for the first time since the outbreak of the global crisis in 2008, noting, “The implementation of new measures restricting or potentially restricting trade has remained unabated over the past seven months, which is aggravated by the slow pace of rollback of existing measures.”

According to the OECD/UNCTAD report on investment policy and investment-related measures, despite the unstable world economy, global foreign direct investment (FDI) inflows rose by 17 percent in 2011, compared with 5 percent in 2010, surpassing the pre-crisis level, but still 25 percent short of their 2007 peak. Their growth is expected to decelerate to 7 percent in 2012. The report reviews the actions by G-20 members on inward and outward FDI. Its major finding is that G-20 members, in a departure from their rising trade protectionism, have mostly continued to liberalize their FDI regimes and kept their pledge not to retreat into FDI protectionism. But there were a few notable exceptions, including an expropriation (Argentina), a divestment requirement (Indonesia) and new entry restrictions (India, Indonesia and Russia). During the period under review, Turkey, to promote inward and outward FDI, concluded three additional bilateral investment treaties (BITs), more than any other G-20 member, raising its BITs total to 87.

According to the 182-page EU report, despite G-20 leaders' pledges to refrain from protectionism, the number of potentially trade restrictive measures has risen by 123 since last September, bringing the total of such measures adopted since the outbreak of the global crisis to 534. The report singles out Argentina, Brazil, China, India, Indonesia and Russia for their rising trade and FDI protectionism. It bemoans the spreading use of trade restrictions as part of new national industrial policies to shield domestic companies from international competition, especially in Brazil, China, India, South Africa and Ukraine.

Trade and FDI are engines of economic growth and job creation. Restricting them is short-sighted and ultimately self-defeating, as proven during the Great Depression of the 1930s. G-20 leaders should heed the warning of the philosopher George Santayana that “those who cannot remember the past are condemned to repeat it.”