Author: Andrew Elek

Deep global recessions can tempt governments to try and shield their own economies.  Resentment by others can then lead to a cycle of retaliation which only deepens the economic downturn.

Despite the bitter lessons of the 1930s, it can all happen again.  Well before employment is hit by the worst of the crisis, governments are already seeking to protect  their producers using border barriers, subsidies among other options.

Aware of these risks, the leaders of the G20 economies committed themselves to refrain from raising new barriers to investment or to trade in goods and services.

Australia, France, Germany, India, Russia and the United States are, nonetheless, taking steps to shield their automobile makers from competition.

The “buy American” provisions in the proposed United States economic stimulus package are likely to spark a widespread response, as Gary Hufbauer, Jeffrey Schott, and Jagdish Bhagwati have already warned. Since then Hufbauer has proposed a relatively informal ‘name-and-shame’ mechanism.

Governments all understand that these new protectionist measures are no more than tactics for containing political pressure while macro-economic policies have time to act.

But even minor protectionist gestures can set off copycat or retaliatory measures.  That is already evident in the automobile industry.  The ‘buy American’ initiative could have substantial trade-restricting effects even it is applied in a way consistent with the United States’ obligations under existing agreements, including WTO undertakings.

It is essential that the G20 build on their November 2008 pledge to refrain from protectionist acts as well as their call for progress in the Doha Round.

It will be hard to complete the Doha Round, but it is just as hard to expect the WTO to make much progress on anything while the Round remains open.  A pragmatic option might be for G20 leaders to insist that the Round be closed quickly on the best deal available.  As Claude Barfield suggests, this would still lead to worthwhile economic gains and considerably less uncertainty.

Closure would accept that this is a time for damage control, not a time to expect major liberalisation.  It would also serve to remind us that the fundamental objective of the WTO is to create a confident and predictable trading environment.

Low formal border barriers can be circumvented by a many forms of contingent protectionism.  Attention to the underlying causes of contingent protectionism is now more urgent than negotiating lower bound rates of tariffs which can be exceeded under a widening set of conditions.

A surveillance mechanism is urgently needed.  Hufbauer has proposed a relatively informal ‘name-and-shame’ mechanism.  A more formal approach would use international organisations effectively under the control of G20 governments (such as the World Bank or the OECD).  They could be commissioned to prepare a list of the trade-restricting measures introduced since November 2008.  G20 governments could then ask each other:

•    to explain why it was considered necessary to depart from their November commitment;
•    to set out any policies that would help minimise the cost of the measures;
•    to provide any reasons why other governments should not follow their example; and
•    to provide assurance that these measures were to be reversed when certain criteria had been met.

In the case of the ‘buy American’ provision in the United States stimulus package, President Obama could seek to explain the measure in the following terms.

He could note that, due to the separation of powers in the United States, it is up to the Congress to draft legislation.  In view of the urgency of a large economic stimulus, it would have been counterproductive to veto the bill, even though the President was opposed to new protectionist measures.

The President could explain that the measures would only affect a small part of total US spending on steel and manufactured products.  By definition, the provision would only apply until the funds appropriated by the stimulus bill had been spent.

He could also explain how he intended to interpret and apply the provisions of  the relevant Section of the stimulus bill.

He should acknowledge that consistency with existing obligations would still leave a lot of scope for discrimination against many economies.  In order to limit such damage, all public agencies would be required to call for open international tenders for any significant purchases of steel and manufactures, in order to make it possible to assess whether the cost of a project would be increased by over 25 per cent.  Since the benefit of the project to the United States economy would be maximised by purchasing products of suitable quality at the lowest possible price, the lowest qualifying bid would be accepted in the national interest.

A statement along these lines should serve to reaffirm the United States’ intention of avoiding widespread resort to protectionism in order to appease the short-term vested interest of some producers.

If the President is unable or unwilling to make a statement along such lines, then retaliation against the ‘buy American’ provisions in the United States stimulus package can be expected.  The potential damage of the bill to the United States economy and to the rest of the world should then be assessed on that basis.

Related articles:

1. The crisis and reinventing WTO negotiations
2. US protectionism’s other names
3. International trade and emerging protectionism since the crisis
4. No let up in the pressure of protectionism 

1. Australia’s lethargic law reform: how (not) to revive consumer spending
2. Korea and the G20 summit next November
3. Japan: separated by a common enemy

This entry was posted on Thursday, February 19th, 2009 at 10:42 pm and is filed under Trade. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.