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Rising Protectionism Threatens Global Trade

Rising Protectionism Threatens Global Trade

Posted on Monday, July 25, 2016

Patrick Low, Fellow of Asia Global Institute, comments on new data that shows countries around the world are turning inwards, hoisting trade barriers and protectionist practices.

Last week's Global Trade Alert report recorded growing levels of protection and stagnant trade in the world economy - the worst record since monitoring began in 2008. The GTA, run by Professor Simon Evenett of St. Gallen University in Switzerland, systematically reports on the incidence of trade measures.

This is the largest private initiative that keeps an eye on trade and other trade-impacting policies across a broad spectrum of nations.

The World Trade Organization, along with the Organization for Economic Cooperation and Development and the United Nations Conference on Trade and Development, undertakes a similar monitoring exercise on trade and investment measures.

It uses a different methodology that yields a lower level of recorded protectionist measures but nevertheless correlates well with the GTA.

The latest WTO report issued in June states that G20 restrictions have reached their highest monthly level since the exercise began in 2009, prompting WTO Director-General Roberto Azevedo to observe that trade is under siege in many countries.

At the margin, there can be honest disagreement about which measures should be labelled protectionist. The GTA, for example, counts any measure with putative discriminatory consequences as protectionist, regardless of why such measures are introduced. The WTO is more circumspect.

Both the WTO and the GTA count measures rather than assessing impact, which is much harder to do. There can be no doubt, however, that protectionism is on the rise.

According to the latest GTA report, restrictive trade measures grew by 50 per cent in 2015 compared to the previous year. In the first four months of 2016, protectionist measures increased by between one-and-a-half and three times compared to the same period each year since 2010.

As recorded in the GTA report, a good chunk of the business world is also worried by deteriorating trade conditions. Companies such as Lufthansa, UPS, Nestlé, Facebook and POSCO have made public statements recently to that effect.

In May GE announced a shift in strategy that emphasises greater reliance on localization. Chief Executive Jeff Immelt referred to this new business model as a "bold pivot", which he attributed to growing protectionism.

This, of course, is exactly what trade-blocking measures are designed to achieve. The business response to protectionism is logical enough in terms of the bottom line.

But countries that corral economic activity in which they are uncompetitive - with little prospect of becoming so - run the risk of courting a cumulatively corrosive effect on growth and development.

What is it that causes governments to ramp up a protectionist stance? The answer to that question is complex, but slow trade and GDP growth undoubtedly has something to do with it.

The 19th GTA report states that trade has recorded zero growth since January 2015, a remarkable occurrence outside a recession. Some commentators have questioned this zero growth finding, which only serves to emphasise that statistics can be tricky.

The trend is clear enough. Trade growth has become far less dynamic in relation to GDP growth in recent years, provoking some to wonder whether trade has peaked.

The argument is not easily settled as to how far it is a range of structural factors, including rising protectionism, that explain sluggish trade growth. The alternative explanation is cyclical, relating mainly to low GDP growth. A bit of everything is probably the explanation.

To the extent that protectionism is a cause, and cosseted industries have little prospect of competing in any foreseeable future, we are clearly in own-goal territory.

n the early 1980s, the notion of "standstill and roll-back" entered the policy lexicon. It refers to a commitment to foreswear protectionism. Such promises have been a centrepiece of declarations by the G7 industrial countries and subsequently the G20 ever since.

The worrying part, however, is that a widening chasm separates rhetoric and reality. Such statements look increasingly ritualistic and empty of intent.

In these circumstances, monitoring activities such as those of the WTO and GTA that shine a light on reality are of great value and deserve close attention.

This article first appeared in the South China Morning Post as Rising Protectionism Threatens Global Trade on July 20, 2016.

The views expressed in the reports featured are the authors' own and do not necessarily reflect Asia Global Institute's editorial policy.

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