Last week, the second of these two issues at the top of the EU's agenda for the G-20 summit began to attract far more attention in the US, which had earlier advocated stricter bank capital requirements instead of restricting bankers' remuneration. Following a tough speech by President Obama highly critical of compensation practices to financial sector executives in New York City at the beginning of the week, The Wall Street Journal reported at the end of the week that the Federal Reserve would, under its existing authority, explore ways of regulating bankers' compensation procedures at all levels. As the financial news reports and commentaries feverishly focused on the reasons for and the implications of the sudden US U-turn on this contentious issue only a week before the G-20 summit, an issue that is less appealing politically but no less important for the health of the world economy did not attract the attention it deserved. The issue, given short shrift in the continuing debate over the G-20's summit agenda, is the rising threat of trade protectionism, which I discussed in two recent columns (“Contingent protectionism is the underbelly of world trade recovery (1) and (2),” July 27 and Aug. 3).
Let's start with one specific protectionist decision, a political payoff by President Obama to US labor unions, to impose steep and punitive tariffs as a special safeguard measure on imports of cheap Chinese tires. This decision, called “economic vandalism” and “playing with fire” by The Economist, coming on top of the previous “buy American” provisions in the US bailout and stimulus packages, provides a worrisome example of insidious protectionism. It might embolden other protectionist demands that Mr. Obama might find hard to resist, as he finds himself in desperate need of support from labor unions in the heated healthcare reform debate. It also raises serious doubts about the Obama administration's commitment not only to freer trade, under the Doha Round negotiations, but also to a standstill on protectionism, promised at both the first and the second G-20 summits. This decision not only antagonized China, which threatened retaliation, but also received the condemnation of The Wall Street Journal, in a scathing editorial which concluded that Barack Obama could be the first protectionist president since Herbert Hoover.
Two reports released last week to draw the attention of next week's G-20 summit showed that the US tariffs on Chinese tires were part of a general trend instead of an isolated incident. The first, titled “Report on G-20 Trade and Investment Measures,” a joint 60-page study by the Organization for Economic Cooperation and Development (OECD), the United Nations Conference on Trade and Development (UNCTAD) and the World Trade Organization (WTO), concludes that although the G-20 countries had avoided “descent into high-intensity protectionism” in reaction to the global crisis, they have by resorting in recent months to tariffs, non-tariff measures, subsidies and burdensome administrative obstacles documented in the report sector by sector and country by country (including Turkey), created "sand in the gears of international trade that may retard the global recovery.” It urges the G-20 to remain vigilant against wide-scale protectionism and conclude the eight-year-old stalled Doha Round world trade liberalization talks in 2010.
The second report, titled “Broken Promises: A G-20 Summit Report,” is a 206-page study released last Friday by Global Trade Alert (GTA), a private and bottom-up project launched last June by an independent and international group of researchers. The GTA is coordinated by the London-based think tank Centre for Economic Policy Research (CEPR), a network of mostly European university researchers. This report, edited by Professor Simon J. Evenett of University of St. Gallen, Swiss Institute for International Economics, follows two earlier CEPR studies, “The Collapse of Global Trade, Murky Protectionism, and the Crisis: Recommendations for the G-20,” issued last March to get the attention of the G-20's April summit in London, and “What World Leaders Must Do To Halt the Spread of Protectionism,” issued last December. The GTA report is much more comprehensive in its scope and much more critical of the G-20's creeping protectionism than the joint OECD-UNCTAD-WTO report. The GTA report's assessment is based on 428 protectionist measures, of which 192 are regarded as “red alert,” at the global level, and on 293 protectionist measures, of which 121 are regarded as “red alert,” at the G-20 level, implemented since the first G-20 summit last November.
The GTA's message is that “the protectionist juggernaut is still in full swing and its pain is being felt across large sections of the world economy.” Its main findings can be summarized as follows: (1) The G-20 has failed to keep its no-protectionism pledge. Protectionism has been spreading, based on quarter-by-quarter increases, in various measures that harm international trade. So far, this year about 70 protectionist measures per quarter have harmed almost every G-20 country, hitting more than 95 percent of all product categories in more than 80 percent of economic sectors. (2) G-20 countries have 134 additional protectionist measures, 77 targeting China, in the pipeline, equivalent to one-half year's protectionism at the present rates. (3) Notwithstanding the widespread political rhetoric about supporting new green industries and fostering innovation, most of the protectionist measures have targeted old industries such as agriculture and declining, low-productivity smokestack manufacturing sectors. What is surprising about the discriminatory protectionist measures in the GTA database is that they are predominantly beggar-thy-neighbor bailouts and state aid (as opposed to trade remedy actions), causing harm twice as often as tariff hikes. According to the GTA report, Turkey has either implemented or announced but not yet implemented 10 protectionist measures harming six of its trading partners. On the receiving side, however, Turkey has faced 84 either implemented or announced but not yet implemented harmful measures by 45 of its trading partners.
The GTA report's urgent recommendation to the G-20 summit is twofold: (1) “Drain the protectionist pipeline -- and don't refill it;” and (2) “Review and unwind trade-distorting measures.” The G-20 leaders, instead of issuing yet another empty pledge to conclude the Doha Round, should heed this recommendation and begin to tame the protectionist juggernaut before it destroys the prospects of a rapid and full global economic recovery.
