Global Trade Protectionism is Rising Discreetly: Sri Lanka Must Stay Alert

As the Sri Lanka Economic Association’s Annual Sessions 2012 kick off today on the theme ‘Export Growth for Sustained Development’, Ashani Abayasekara (Research Assistant – IPS) writes that trade protectionism is raising its ugly head through subtle yet substantial ways, and the Sri Lankan export sector must keep a close watch. Some of the top offending countries are Sri Lanka’s leading trading partners.

 

“Global trade is under strain. You can hear the acid of protectionism starting to drip-drip-drip on the mechanism of global trade. It hasn’t penetrated the structure yet, but it is starting to stain the surface”, is how Douglas Paal, of the Carnegie Endowment for Peace in the USA, characterized the emerging trend(1). It was expected that the 1930s style protectionism of Smoot-Hawley tariffs(2) would be unlikely after the 2008/09 global economic crisis. This has certainly held true as trade wars using tariffs as a principal protectionist tool has not taken place. In fact, at the G20 Summit in Seoul in 2010, while the crisis was still burning, leaders of the grouping of developed and emerging economies strongly affirmed that protectionist measures will be restricted. But as global economic prospects have continued to dip, so has the resolve by countries to refrain from protectionist measures. Several reports have sounded the alarm. A joint WTO-OECD-UNCTAD report(3) released in May 2012 shows that since mid-October 2011 the G20 economies – which account for a vast majority of the world’s economic output and trade – have added 124 new restrictive measures affecting about 3% of global imports and nearly 4% of G-20 trade. A report(4) released by the European Union (EU) identifies a “staggering increase in protectionism” in recent months with a 25% rise in trade-restrictive measures. The latest Global Trade Alert (GTA) report(5) which monitors trade tensions demonstrates that protectionism in 2010 and 2011 was significantly higher than previously estimated, representing a 36% increase, with many more measures to be implemented in the pipeline.

 

Harder to Detect

 

Trade protectionism isn’t always optimal as it could often translate into lost commercial opportunities, threatened jobs, and slower economic recovery. As pointed out in the GTA report, the recent rise in protectionism has not been very conspicuous because protectionist measures have taken new and subtle forms, many of which are not captured by existing WTO prohibitions. For instance, the GTA report(6) identifies 101 out of the 132 new protectionist measures adopted in the fourth quarter of 2011 as forms of discriminatory state intervention other than traditional trade defense measures or tariff increases. Such measures, termed ‘behind-the-border’ or ‘creeping protectionism’ include environmental clauses, discriminatory investment measures, export subsidies, discriminatory bailouts, and wage subsidies.

 

G20 – Main Culprits

 

The GTA report shows that the G20 is responsible for the bulk of protectionist measures and that the share is on the rise. In 2009, approximately 60% of all protectionist measures were taken by G20 countries, and this had risen to 75% by 2011 and to a further 79% by June 2012. Moreover, as pointed out by the WTO, it is worrying to note that the more recent surge in trade protectionism appears to be no longer aimed at dealing with the effects of the global crisis, but rather at trying to fuel recovery.

 

It’s not just the developed country members in G20 that are contributing to this trend; these measures are steadily rising in emerging markets including China, Vietnam, India, Russia and Brazil too (Table 1). China ranks first in terms of the number of trading partners affected by discriminatory measures and third and fourth in terms of the number of sectors and number of tariff lines affected, respectively. Results of a study which attempts at identifying the most harmful state measures to the world trading system indicate that China appears top on the list, with the measure of export tax rebates affecting 243 tariff lines and 155 trading partners(7). Vietnam is another top offender, affecting the highest number of tariff lines, while Russia has imposed the second highest number of discriminatory measures. India has also imposed a significant number of protectionist measures and has in turn affected a high number of its trading partners. In fact, compared to a ranking based on the total number of discriminatory measures implemented, India is among the four top economies to move up the list of offending G20 nations.

 

Table 1: Highest Imposers of Discriminatory Measures

Rank

Discriminatory Measures

Number imposed

Number of tariff lines affected

Number of sectors affected

Number of trading partners affected

1

EU27 (302)

Vietnam (931)

Argentina (63)

China (193)

2

Russia (169)

Venezuela (786)

Algeria (62)

EU27 (187)

3

Argentina (141)

Kazakhstan (732)

EU27 (57)

Netherlands (163)

4

India (74)

China (701)

China (52)

Germany (155)

Poland (155)

5

UK (67)

EU27 (656)

Nigeria (45)

Russia (45)

6

Germany (64)

Nigeria (599)

India (153)

Indonesia (153)

7

France (61)

Algeria (476)

Germany (44)

8

China (60)

Argentina (467)

Kazakhstan (43)

USA (43)

Belgium (152)

Finland (152)

9

Italy (56)

Russia (446)

10

Brazil (54)

India (401)

Ghana (41)

Argentina (151)

Source: Evenett, Simon J., 2012, Debacle: The 11th GTA Report on Protectionism, London: Center for Economic Policy Research.

 

Trade Tensions

 

Mounting trade tensions between China and the US is another cause for concern, as it could further dim the already gloomy economic outlook. Frictions have increased as China and the US both focus on the high-end manufacturing sector including new energy and materials. US protectionism has been shifting from traditional sectors to emerging ones. In the past two years, the US has launched a host of trade investigations targeting China’s new-energy products(8) Signaling a further rise in trade protectionism, the US set up the Interagency Trade Enforcement Center in February 2012 to investigate ‘unfair trade practices’ from its major trading partners. Moreover, trade investigations from the US have also prompted other nations to follow suit(9)

 

Sri Lanka – Staying Alert

Rising protectionist trends in both the developed world and emerging economies could have significant repercussions for developing and least developed countries, in particular for countries that depend on external demand for its goods and services to sustain growth. As a small open economy, Sri Lanka is dependent to a large extent on external demand both to sustain domestic growth as well as to earn foreign exchange for its import expenditures. The recent decline in absolute export earnings of the country – in addition to a declining share in world exports and exports-to-GDP ratio – is a significant concern. The fact that Sri Lanka’s key trading partners – the US, EU and India – feature top on the list of countries imposing the highest discriminatory measures is possibly the most worrisome part of this whole discussion. The escalating trend of discreet yet damaging trade restrictive measures will no doubt pose a considerable challenge to Sri Lanka’s export growth drive.

 

 

Notes:

1′The Growing Threat of Global Trade Protectionism’, http://carnegieendowment.org/2010/09/28/growing-threat-of-global-trade-protectionism/40ef

2The Smoot-Hawley tariff act was an act sponsored by Senator Reed Smoot and Representative Willis C. Hawley, and signed into law on June 17, 1930, that raised US tariffs on over 20,000 imported goods to record levels and which reduced US exports and imports by more than half.

3 http://www.wto.org/english/news_e/news12_e/igo_31may12_e.htm.

4 http://trade.ec.europa.eu/doclib/press/index.cfm?id=804

5 Evenett, Simon J., 2012, Debacle: The 11th GTA Report on Protectionism, London: Center for Economic Policy Research.

6 Evenett, Simon J., 2011, Trade Tensions Mount: The 10th GTA Report, London: Center for Economic Policy Research.

7 Evenett, Simon J. and Johannes Fritz, 2012, “Jumbo” Discriminatory Measures and the Trade Coverage of Crisis-Era Protectionism, Center for Economic Policy Research, GTA Analytical Paper No. 3..

8One example is the launching of US anti-dumping investigations against China’s leading solar panel manufacturers.

9The imposition of anti-dumping duties by the US on Chinese-coated paper in 2006 prompted Brazil, Argentina and Thailand to launch similar investigations.