Protectionism is on the rise all over the world, " thanks" or should
we say "no thanks" to the global economic crisis. Last November, G-20
leaders pledged to fight protectionism. Yet 18 of their economies
appear in a World Trade Organisation (WTO) report because of measures
taken since the crisis to restrict trade. With the global economy
struggling to recover, political pressures demanding protection from
import competition to sustain domestic employment are intensifying
around the world. It is likely to prove right the old adage that the
only thing we learn from history is that we never learn from history.
One lesson from the experience of the 1930 s that is currently most
relevant is that raising trade barriers deepen and prolong
recession. There is no shortage of creativity when it comes to
protectionist measures. Since November 2008 , several countries have
implemented a variety of measures that on the surface do not appear
to be restrictions on trade but in effect restrict trade at the
expense of other countries. * One example is Argentina's imposition of
non- automatic licensing requirements on auto parts, textiles, TVs,
toys, shoes, and leather goods. * Indonesia's requirement that five
categories of goods -- garments, footwear, toys, electronics, food
and beverages -- are permitted at only five ports and airports is
another one. * Some countries have tightened standards to slow import
entry, including, for example, China' s import ban on Irish pork as
well as rejection of some Belgian chocolate, Italian brandy, British
sauce, Dutch eggs and Spanish dairy products; and India's ban on
Chinese toys. These do not include antidumping measures. The number of
antidumping initiations surged in 2008 after a period of slowdown.
Developing countries accounted for the majority of the initiations,
though developed countries accounted for the greatest number of duty
impositions. India was the most active, accounting for 29 percent of
total initiations. The US and EU were the two regions that have most
frequently imposed duties. In a global recession, each country wants
to boost demand for the goods it produces, leading to a "prisoners'
dilemma". Policies that divert demand to domestically produced goods
are rational from a national point of view, but irrational from the
global perspective when all countries do the same. Such policies are
obviously a losing proposition, but no one nation would benefit by
refraining from it when others are not. There is no better example of
nations attempting to live at the expense of each other than trade
protection. It is indeed possible that these policies are not just
globally irrational, but nationally irrational as well. An increase
in domestic demand due to increased protection is likely to put
upward pressure on interest rates. An increase in domestic interest
rates induces capital inflow, leading to currency appreciation if
exchange rate is flexible. This makes exports more expensive and
imports cheaper. Consequently, exports fall and imports rise. The
resulting fall in net exports offsets the initial expansion in
domestic demand. Thus, part or all of the increased demand from
higher protection leaks out to foreign countries. Most countries, by
the way, have flexible exchange rates. The impact of the
protectionist measures so far is most probably small. The sharp falls
in trade volumes since the onset of the global crisis resulted not
from protection, but from the global recession and from the rapidly
rising costs of an emaciated pool of trade finance. Nonetheless, the
trend in protection is a big concern. Fortunately, unlike the 1930 s,
countries at present are far more interdependent through supply
chains and imported inputs. Production chains link global markets
through a network of trade in parts, components and even services.
Also, export interests are far more powerful. Rounds of agreements
under GATT/WTO have provided much greater institutional stability of
trading relations. The changed political economy has helped circumvent
some egregious restrictions such as the "Buy America" provision in
the US stimulus package. Repetition of the infamous Smoot-Hawley act,
which increased nearly 900 import duties in the US in June 1930 ,
is hopefully no more a possibility. A key lesson from this experience
is that progress on trade liberalisation is never safe from the
piracy of special interests. Protectionism never really dies. The
author is senior economist at the World Bank Dhaka office. Views
expressed in the article are strictly his own.
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