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Economics & Finance

Why free trade, not protectionism, is the answer

The completion of the Doha Round of global free trade agreements is central to resolving the current global economic crisis. Speakers at this year’s European Business Summit stressed that governments should help enable global free trade to rejuvenate economic growth, rather than turn to protectionist measures.

“It is the job of governments to support, protect their people, their industry, their business, to effectively be able to trade for the future,” says Baroness Ashton, EU Commissioner for Trade.

“That’s quite different to saying that you’ll put up the barriers to prevent trade, not least because in the end you protect nobody.”

Doha’s stimulus impact

According to estimates by the World Trade Organisation (WTO), tariff and subsidy cuts for trade in goods tabled in the Doha Round were equivalent to a stimulus package of US$150 billion. The WTO estimated that this amount could be more than doubled by other free trade initiatives under discussion.

But without the completion of the Doha Round, average tariffs worldwide could legally be doubled, which would hurt international trade. Indeed, the WTO forecasts a nine per cent decline in the volume of global goods traded in 2009, which would be the worst contraction in 60 years.

Although world leaders at this year’s G-20 Summit have called for the swift completion of the Doha Round and agreed to avoid adopting protectionist measures until the end of 2010, they failed to set a date to resume negotiations, which had stalled last year.

According to the World Bank, 17 G-20 countries have enacted protectionist measures, despite a G-20 statement last November against protectionism.

Ironically, it is during times of economic turmoil that further hamper trade liberalisation, as governments are constrained by domestic pressures.

“It’s very, very difficult when you’re dealing with your constituents, your citizens whose jobs are on the line. It’s very, very difficult to explain why you don’t want to prevent what they see as jobs coming in or business coming in to take their jobs away,” says Ashton. “It’s very, very difficult especially when you don’t have alternatives to offer.”

Little optimism for Doha completion

Indeed, economist Jagdish Bhagwati, another speaker at the Summit in Brussels, says he’s not optimistic about the completion of the Doha Round anytime soon.

“I just don’t see how in a condition of macroeconomic crisis we could really get a settlement right away or in the next few months,” says Bhagwati, a professor in economics and law at Columbia University and a senior fellow in international economics at the Council on Foreign Relations.

“Because one thing we do know from history is that during macroeconomic crisis, no democracies actually are able to move forward in terms of liberalisation. I think what we can do is to prevent sliding back into protectionism.”

However, Pascal Lamy, Director-General of the WTO, argues that advancing the Doha Round would be a “low-hanging fruit” in resolving the global economic turmoil, as most countries are already in recession.

Currently, the Doha Round is 80-per cent complete but concluding the remaining 20 per cent won’t be easy, Lamy acknowledges.

Nevertheless “there’s hope because in this economic crisis, the notion that increasing these (free trade) disciplines in a direction that makes them more development-friendly has more value than one or two years ago,” says Lamy.

Furthermore, the completion of the Doha Round is the “only bit of blue sky” for developing countries, which are dependent on international trade.

“The answer to this crisis for many countries … who do not have the big money to bail out banks or industries, is about making sure that they can trade their way out of the crisis,” says Lamy.

Protectionism on the rise

However, at least nine major trading nations have enacted protectionist measures such as tariff and non-tariff barriers, anti-dumping, and subsidies for industries, according to a WTO report published in March. But the report notes that there is no sign of widespread “high intensity protectionism”.

According to the report, most of the 153 WTO member-nations had kept domestic protectionist pressures under control at the start of this year, but there has since been “significant slippage”, says Lamy.

Still, there has not been a dramatic increase in protectionism despite a “certain amount of increased tendencies”, says Nani Beccalli-Falco, President and CEO of GE International.

The solution, he says, is to create products that the market wants so that the world can trade itself out of protectionism.

Beccalli-Falco hopes the global economy will emerge “in a fairly decent way” because there is far greater international trade in the world today than in the Great Depression era of the 1930s. There’s also much greater cooperation currently between public institutions and private enterprises.

For instance, business supply chains have become global, with production parts being designed in some countries and manufactured in others, Beccalli-Falco points out.

“This supply chain cannot be changed and broken in a short period of time. It would need a long cycle in order to be changed, so the times are really different,” he says.

Beccalli-Falco also notes that the global economic downturns in 1991 and 2001, which were “deep and sharp” but short, were followed by strong periods of economic growth, fuelled by technological innovation and globalisation. As such, he says he believes that the world will experience another two decades of growth after it emerges from the current economic morass.

Another panelist at the Summit, Anders Dahlvig, CEO of furniture chain IKEA, also voiced concerns about international protectionism, saying there has been “very little change” over the years.

For instance, Dahlvig has tried to persuade Russia to reduce its custom tariffs of about 30 per cent for a decade now to no avail. He also notes that India’s restriction against full foreign ownership of businesses is “a very effective protectionist measure”. And in China, the government sets test standards for goods in accordance with domestic rather than international standards.

Other forms of protectionism, says Dahlvig, include corruption and bureaucratic red tape, which are major local issues.

Trade discriminations and “neo-xenophobia”

In any case, the threat of retaliation is moderating protectionism, says Columbia University’s Bhagwati. But as protectionist measures can directly violate WTO rules or exploit the loopholes, the completion of the Doha Round is “extremely important” in strengthening the multilateral systems and boosting the credibility of the WTO rules.

Governments, says Bhagwati, are exploiting existing WTO loopholes through providing subsidies to industries and countervailing measures.

Bhagwati also criticised the US government’s bail-out of American automakers as “discriminatory” because the funding was not provided to foreign automakers with production plants in the US.

Even President Obama has not said anything about such trade discrimination, Bhagwati notes. “No politician or statesman is really standing up to it and saying ‘this is undermining the system’”.

Bhagwati also warns against “neo-xenophobia” which is “taking over, under the stress and anxiety”, as people want foreign workers to be fired first and hired last.

For instance, French President Nicholas Sarkozy even went so far as to ask French companies abroad to “come home”, Bhagwati says.

“I think there’s a huge amount of pressure against the ‘open society’, which is extremely (anti)-productive.”

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