51629 The World Bank JULY PREMnotes 2009 N U M B E R 139 TRADE POLICY Trade-Related Policy Responses to the Crisis: A Stock Taking Simon Evenett (University of St. Gallen & CEPR) Bernard Hoekman (World Bank & CEPR) Olivier Cattaneo (World Bank) 1. The context 10 percent in 2009, the worst decline in The world is facing the most severe global trade since the 1930s. While all regions in economic crisis since the Great Depression the world are severely affected, the impact of the 1930s. For the first time since World of the decline is stronger in countries War II, World Bank projections for annual that are highly dependent on trade with economic growth show that world GDP will developed countries where demand has decline -2.9 percent in 2009 and growth contracted most. For example, in Cambo- in developing countries will fall to 1.2 per- dia, which relies heavily on tourism and cent from 5.9 percent in 2008.1 Excluding exports of garments to the United States, China and India, other developing nations' growth fell from 10.2 percent in 2007 to economies will shrink on average by -1.6 6.7 percent in 2008 and the economy is ex- percent. Net private capital flows to devel- pected to decline by 1 percent in 2009. oping countries will likely turn negative Governments have responded to the in 2009--a more than $800 billion drop crisis with large fiscal stimulus packages from the 2007 peak. The decline in global and central banks around the globe have foreign direct investment (FDI) flows that engaged in far-reaching monetary eas- started in 2008 will deepen and spread ing. The objective has been to support to the developing world, with overall demand and thus economic activity and inflows projected to fall some 30 percent employment. Efforts have been made to compared to 2008, the first time FDI has coordinate policy responses through the fallen more than 10 percent in a year since G-20 and other forums, including in the 1986. The value of remittances, perhaps area of international commerce. Maintain- the most stable source of external financ- ing an open trade regime is an important ing for developing countries, is expected part of the path for getting out of the crisis. to drop by at least 5 percent this year. At the April 2, 2009 London Summit, the Trade is no exception. Global trade G-20 countries committed to refrain from volumes are expected to decline by some raising new barriers and to minimize any FROM THE POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK negative impact on trade and investment 2. What we have observed so far of domestic policy responses to the crisis This note summarizes the findings of a (Box 1). This recognizes the importance set of papers presented at a joint World of not taking measures that discriminate Bank-CEPR conference in May 2009 that against and between foreign providers of assessed the prevalence and cross-border goods and services, which would further effects of the different policy responses disrupt the commercial playing field. The put in place by governments to the crisis.2 systemic risks of a significant resort to The conclusion that is suggested is "so far protectionist policies are generally recog- so good," or to paraphrase Josling and nized by world leaders. Protectionism in Tangermann (2009), so far the protection- the 1930s, as well as more recent extensive ist "dog did not bark." Although there is protectionist measures ("voluntary" export much heterogeneity in terms of policy restraints for cars, quotas on textiles and responses, and a growing number of coun- steel) during the early 1980s recession, il- tries have put in place some protectionist lustrate that if some major countries put in measures (WTO 2009), to date we have not place measures to close domestic markets, observed large-scale increases in the level the risk of others following is high. What of discrimination against foreign suppliers is most important is that all major trading of goods and services by major trading nations hold the line and maintain open states. Indeed some countries, including markets. Mexico, have responded by reducing tar- iffs and other barriers to trade. Box 1: Paragraph 22 of London Summit Communiqué, 2 April 2009 World trade growth has underpinned rising prosperity for half a century. But it is now falling for the first time in 25 years. Falling demand is exacerbated by growing protectionist pressures and a withdrawal of trade credit. Reinvigorating world trade and investment is essential for restoring global growth. We will not repeat the historic mistakes of protectionism of previous eras. To this end: · we reaffirm the commitment made in Washington: to refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports. In addition we will rectify promptly any such measures. We extend this pledge to the end of 2010; · we will minimise any negative impact on trade and investment of our domestic policy actions including fiscal policy and action in support of the financial sector. We will not retreat into financial protection- ism, particularly measures that constrain worldwide capital flows, especially to developing countries; · we will notify promptly the WTO of any such measures and we call on the WTO, together with other international bodies, within their respective mandates, to monitor and report publicly on our adherence to these undertakings on a quarterly basis; · we will take, at the same time, whatever steps we can to promote and facilitate trade and investment; and · we will ensure availability of at least $250 billion over the next two years to support trade finance through our export credit and investment agencies and through the MDBs. We also ask our regulators to make use of available flexibility in capital requirements for trade finance. 2 PREMNOTE JULY 2009 A stylized fact that is suggested by the a certain level of protection. Although the evidence to date and the analyses included use of trade policy is less effective and in the volume of World Bank-CEPR con- efficient than fiscal and monetary policy, ference papers is that where multilateral using instruments of contingent protec- disciplines exist, recourse to protection- tion to manage pressures for restricting ism has been limited (Messerlin, 2009). imports in specific sectors is typically su- Some countries have utilized the "policy perior to a government having recourse space" they have to raise tariffs, but projec- to nontariff barriers (such as voluntary tions--based on past behavior--are that export restraints [VERs] in 1980s). In his any such increases are likely to remain analysis of the use of these WTO "trade limited: Foletti and others (2009) predict remedies," Bown (2009) notes there has increases in 2009 of perhaps 8 percent. been an 18.5 percent increase in the use In the area of agriculture, Josling and of antidumping, safeguards, and coun- Tangermann (2009) stress that reactions tervailing duties, including by almost to the crisis have been relatively muted, all the G-20 countries. These actions and good news (tariff reductions, removal increasingly affect "South-South" trade of import bans and export taxes) coincides and primarily target exports from China. with bad news (tariff increases, reactivation However, the amount of imports targeted of export subsidies). In a sector that in by these measures thus far remains rela- the 1970s and 1980s became a bastion of tively small--less than half of one percent protectionism, textiles and apparel, Fred- of the total merchandise imports of G-20 erick and Gereffi (2009) argue that policy countries. The number of measures taken remains very open. Another illustration is still below what it was only a few years of this stylized fact is that countries that ago, suggesting that apart from a few are not WTO members are among those countries such as India, the overall use of that have made the most intensive use of these instruments remains limited. measures to restrict trade and investment A second and related stylized fact (for example, Algeria and the Russian emerging from the papers is that where Federation). no multilateral disciplines exist, or where Insofar as protectionist actions are be- they are weak and limited in coverage, ing pursued, many are taking the form of countries have been less able to resist pro- measures permitted by the WTO, especial- tectionist pressures. The reintroduction ly antidumping and (selective) safeguard of export subsidies by the United States actions. While such measures are discrimi- and the European Communities (EC) are natory and clearly inconsistent with the high-profile examples of this point; high letter (and spirit) of the G-20 declaration, profile precisely because these subsidies they are relatively transparent and in are thought to have harmed many devel- principle are constrained by multilateral oping countries' commercial interests in rules. Indeed, these instruments are often the past. According to Global Trade Alert, described as "safety valves" that need to 80 jurisdictions export the commodities be included in trade agreements in order for which the United States has reintro- to give governments the assurance that if duced export subsidies.3 The comparable needed for political purposes--as is the number of affected exporting jurisdictions case today--they will be able to re-impose for the EC's export subsidies was 41.4 JULY 2009 PREMNOTE 3 Claessens (2009) stresses that the ab- mercial interests is the consequence of sence of adequate multilateral disciplines the nontransparent discretion given to and mechanisms for cooperation in the regulators and line ministries. This type of area of financial services gave rise to na- protectionism can be difficult to identify, tionalist solutions and distorted resource and harder to quantify. For example, it allocation decisions, which undermined could be the strings attached to bailouts conditions of competition. Similarly, the received by automobile producers in lack of multilateral disciplines on the Europe. All too often, the devil is in the movement of natural persons providing details of implementation rather than services implies that countries are free the umbrella legislation. This suggests to unilaterally redefine the rules of the that there is an urgent need to monitor game and (re-)introduce barriers to the closely what all government bodies do, not local employment of foreign profession- just those central entities that are subject als. Malaysia, the United States, and the to international trade disciplines. Jenny United Kingdom have done just that in (2009) argues for a systematic assessment the past six months.5 The absence of any of the impact on competition of all the disciplines in the WTO on measures that policy responses to the crisis. This is par- affect the export of services implies that ticularly needed for state policies that are source countries are free to take actions promoted as serving some unobjection- that have the effect of raising the costs able objective but where the implementa- and/or reducing the flow of financial tion details suggest that competition and services. market forces are unduly distorted. On stimulus packages and public pro- Beyond this "murky" protectionism, curement, Evenett (2009) notes that WTO given that countries appear to be abid- disciplines in this area have limited cover- ing by WTO commitments where these age and that local (subnational, municipal) apply, the problem is that no multilateral governments may be free to require that disciplines apply to financial services or funds be spent on domestic firms, raw fiscal stimuli. Alternatively, countries have materials, and parts and components. A not committed themselves to abide by number of examples of explicit discrimi- the appropriate multilateral disciplines. nation can be found in the implementing Ultimately this suggests a priority for gov- regulations of the American Recovery and ernments is to (re-)engage in negotiations Reinvestment Act at the state and local to establish such disciplines. Indeed, the level. Similar provisions have been ad- resort to discriminatory state policies dur- opted in Australia by New South Wales and ing this sharp global economic downturn most recently (it is said) by China--neither could--and should--help define the com- of which is bound by the relevant WTO mercial policy priorities for governments disciplines on procurement because they in the early twenty-first century. have not signed the Agreement on Gov- ernment Procurement.6 3. Factors explaining the limited The policies in these areas are po- use of trade policy to date tential examples of so-called "murky" Although many countries have imposed protectionism (Baldwin and Evenett, protectionist measures, there has not been 2009), where damage to foreign com- much in the way of tit-for-tat retaliation. A 4 PREMNOTE JULY 2009 number of factors explain why, so far, pro- principle. As mentioned above there is a tectionism seems to have been contained. negative correlation between the use of As Irwin (2009) stresses, the foremost rea- restrictive trade policy and WTO disci- son that countries have been able to avoid plines in the relevant areas. If the number repeating the experience of the 1930s is of WTO and investment disputes increase their willingness to rely on expansionary substantially as the crisis unfolds, then this monetary and fiscal policy. In the 1930s finding may need to be nuanced. Still, it these instruments could not be used to the would demonstrate that governments are same extent due to the gold standard and resorting to official dispute settlement balanced-budget orthodoxy. procedures and not taking matters im- Another important factor is the ex- mediately into their own hands. tensive globalization of production that There is also a willingness to build on has occurred in the last 20 years or so. and use the multilateral trading system For many companies (and thus govern- as a tool to fight the crisis. The ability to ments) this has changed the incentives to pledge over $250 billion over the next two seek protectionist policies. Maintaining years to boost trade finance is an example an open trade regime is in the interest of (Chauffour and Farole, 2009). Another firms that are part of global supply chains, factor is engagement by the WTO to ac- as closure would substantially raise costs tively and publically monitor members' and undermine competitiveness. This policies, thereby increasing transparency helps to explain why many of the countries and stimulating peer pressure with regard that have taken overt protectionist action to the design and implementation of po- tend to be less integrated in global supply tentially harmful policy responses to the chains (for example, Algeria, Argentina, crisis (WTO 2009). Ecuador, India, and Russia). It may also explain why firms have sought bailouts 4. Worrisome trends call and subsidies rather than tariff increases for increased vigilance, from their governments. Tariff increases now and in the future are not much use to a firm that sells little The monitoring work of the WTO and to the market in which it is operating or other organizations including the World where a sharp economic downturn has Bank has revealed some worrisome trends cut into the customer base substantially. that could strengthen if the crisis lasts and It is much better to obtain a direct fiscal deepens. The crisis has put governments transfer--a subsidy--if available, rather under severe pressure to assist domestic than wait for a tariff to reshuffle what industries and support employment. It is customers remain from foreign goods to too early to know whether the worst of the goods produced domestically. decline in economic activity is behind us. A third factor is the WTO, as well as But even if the crisis is now bottoming out, deep regional integration agreements the prospects are for a slow recovery. This such as the EU and the web of bilateral implies that governments will remain un- investment treaties (Van Aaken and Kurtz, der pressure for some time to take actions 2009). There are now binding interna- to support local economic activity. tional disciplines that help deter countries A number of considerations call for in- from violating the national treatment creased vigilance over the next months: JULY 2009 PREMNOTE 5 1. Only a small portion of the stimulus rules. There has been substantial "slip- package money has been spent so far, page" in the global trade system towards and implementation may produce more discrimination in recent years and further discrimination. As trading some complacency regarding breaches of partners realize the growing level of the nondiscrimination principles that are discrimination, the temptation to "re- the core of the WTO system. Elements of taliate" may grow. this slippage include the spread of pref- 2. Even the most optimistic forecasts for erential trade agreements, both reciprocal economic recovery imply substantial and unilateral, and selective safeguard increases in unemployment in the actions. The general trend away from major trading powers in 2010 and, in MFN--part of the status quo ante--has some cases, in 2011. In fact, the unem- received considerable attention in the ployment rises experienced to date are context of the crisis as a result of the fear smaller than the rises expected in the of repeating the historic mistakes of pro- coming 12 months. Rising unemploy- tectionism. This suggests the crisis may ment has long been associated with have a silver lining for the trading system; government resort to protectionist it may revive interest in, and support for, measures. The protectionist tempta- pursuit of multilateral cooperation. tion will almost surely intensify before it abates--a finding that will hold even 5. Policy implications and if the much vaunted "green shoots" do recommendations emerge into recovery. Resisting the protectionist temptation is 3. Many governments now have little not a matter of luck or chance. Beyond margin for maneuver in fiscal and declarations of good intent, concrete steps monetary policy, and in the event that toward reinforcing the global trade system the recession persists, they could turn are needed. to trade and industrial policies as a The crisis has revealed that rules stop-gap resort. matter: WTO disciplines appear to have 4. A significant increase in the use of played a positive role in constraining re- trade-distorting policy by a major course to protectionism. This makes rapid jurisdiction could set off unwelcome conclusion of the Doha Round important. domino effects, not unlike those wit- The responses to the crisis clearly illus- nessed for auto subsidies, diary export trate that a multilateral trade negotiation subsidies, and procurement national- should not be assessed only on the basis of ism in the last few months. how much new market access opportunity it generates. This has been the metric used While there is clear need for continued by many lobbies, analysts, and the press, vigilance in the coming months, the crisis as well as some key negotiators. It is mis- has also revealed significant weaknesses in conceived. The primary role of the WTO the WTO transparency and notification is to set the rules of the game and to lock mechanisms. Monitoring of policies has in the policies of members. shed a new light on the limited extent of As the crisis continues, the opportunity information on discriminatory application cost of inaction on Doha rises. A common of policies, whether or not subject to WTO conclusion from the contributors to the 6 PREMNOTE JULY 2009 World Bank-CEPR workshop is the need contemporary regulatory priorities as they to rapidly conclude the Doha round. This relate to the global trade and financial sys- would limit the ability of governments to tem.7 The absence of international rules increase tariffs or agricultural subsidies in these areas allows discrimination to be in the future, send a strong signal of the pursued with impunity. international community's commitment Second, "murky" protectionism may to keep trade and investment flowing, and not be just a crisis phenomenon. The help countries resist pressures for protec- monitoring work and related analysis tion when they begin to unwind their revealed that very little is known about current expansionary policies. The value the distribution of local government pro- of "what's on the table" has increased as curement and what share of purchases is a result of the crisis. allocated to local firms. The same is true Concluding Doha is also important of subsidies and many nontariff policies. because critical policy matters outside In part this is a reflection of the absence the Doha Development Agenda need of multilateral disciplines, so that there is to be addressed. The lack of agreement no need to report or to collect the requisite on the Doha Round is crowding out the data. In part it is a reflection of the fact prospects for cooperating on initiatives that WTO members are simply not living that address large cross-border knock-on up to their existing commitments in the effects. Climate change is the most obvi- area of notifications and transparency. ous example: there is an urgent need for At a minimum, recent monitoring ex- governments to consider the implications ercises suggest that the WTO notification for the trading system of concerted action and review mechanisms have been both to reduce carbon emissions and green neglected and inefficient. It is important house gas emissions. Finishing the Doha to increase monitoring and public report- Round is a precondition for addressing ing efforts, so that government measures some of the weaknesses in the global trade that could negatively affect trade and and financial architecture that the crisis investment--whether compatible or not has revealed. with WTO rules--can be identified more Government responses to the current systematically and at an earlier stage. global economic downturn have other Transparency is one of the best defenses implications for the multilateral trading against rampant protectionism.8 Predict- system. First, the areas where "murky" ability and security of transactions remain protectionism has emerged suggest that the main drivers of global trade and in- there is a need to expand the scope of vestment. multilateral cooperation. Potential areas Steenblik (2009) (on "green protec- for negotiating rules of the game include tionism") and Borchert and Mattoo (2009) competition policy, public procurement, (on services) illustrate that, whether or not other nontariff barriers, service-sector policies are subject to disciplines, it is im- regulation, and subsidies, including in- portant that there be regular monitoring vestment incentives. "Murky" protection- of government policies that may have ma- ism is just one facet of a fundamental jor cross-border spillovers and analysis of mismatch between trade rules that were their impact and incidence. In some policy designed in the early 1990s or earlier and areas there is much information; see, for JULY 2009 PREMNOTE 7 example, Weber and Wyplosz's (2009) term costs of short-term policies may be observations on exchange rate policies. significant if they result in future suppliers In other policy areas we are very much (trading partners) requiring a "risk pre- in the dark, especially on nontariff mea- mium" to supply services. It was amidst sures (Gamberoni and Mimouni, 2009). strained circumstances, in 1943­44, that Beyond ad hoc monitoring mechanisms, the architecture of the post-war world eco- it is necessary to strengthen institutional nomic order was established. There should notification and review mechanisms, such be no delay on taking action to begin to as on subsidies, competition, public pro- remove discriminatory and trade-distor- curement, nontariff measures, or services tive measures that have been adopted to trade policies. This will require dedicated respond to the crisis. resources, both financial and political, Finally, it would be short-sighted to as the data will need to be collected and yield ground to protectionism. The crisis compiled. is stimulating innovation by firms and Third, while many government policy thus creating new trade opportunities. responses to the crisis may be temporary, Eventually the crisis will end and once the the effects of "buy national" or "buy lo- recovery starts the more open economies cal" could prove enduring if they result in will be better placed to benefit from the emulation. For example, note that some of increase in demand. From this perspec- the countries engaging in "buy national" tive, it is particularly important that efforts policies also have been most interested continue to focus on enhancing the com- in seeing developing countries accede to petitiveness of firms and farmers in low- the Agreement on Government Procure- income countries by, among other things, ment. The mixed signals being sent may actions to lower real trade and transport have long-term negative consequences costs. In general, sustaining efforts to ex- for the realization of this objective. The pand the delivery of "aid for trade" and same is true of government actions that achieving the related commitments made restrict the access of foreign workers to at the 2005 WTO ministerial meeting in local services markets, especially in those Hong Kong, China should be a priority, countries where the demographics point as they will help developing countries to to a greater need for foreign workers in the benefit more from the recovery. future (Dhar and Srivastava, 2009). Long- 8 PREMNOTE JULY 2009 References Frederick, Stacey, and Gary Gereffi. 2009. Baldwin, Richard, and Simon J. Evenett, eds. "Review and Analysis of Protectionist 2009. The Collapse of Global Trade, Murky Actions in the Textile and Apparel In- Protectionism, and the Crisis: Recommenda- dustries." tions for the G-20. Centre for Economic Gamberoni, Elisa, and Mondher Mimouni. Policy Research (CEPR). A VoxEU.org 2009. "Non-Tariff Measures: Business publication (www.voxEU.org). Views of Recent Trends." WTO. 2009. Report to the TPRB from the Irwin, Douglas A. 2009. "Avoiding 1930s- Director-General on the Financial and Style Protectionism: Lessons for Today." Economic Crisis and Trade-Related De- Jenny, Frederic. 2009. "Responses to the velopment. WT/TPR/OV/2, July 15. Economic and Financial Crisis: Whither Competition?" Forthcoming papers Josling, Tim, and Stefan Tangermann. The following papers, cited in this PREM 2009. "Agriculture: The Dog that Did note, are forthcoming in a volume of the Not Bark?" World Bank/Palgrave-McMillan Trade and Messerlin, Patrick. 2009. "A `Significant Slip- Development Series (available in Fall 2009). page' in Protectionism? Not Yet." Summaries were published in the World Steenblik, Ronald. 2009. "Green Protection- Bank/CEPR e-book, The Fateful Allure of ism." Van Aaken, Anne, and Jürgen Kurtz. 2009. Protectionism (www.voxeu.org). "The Global Financial Crisis and Inter- national Economic Law." Borchert, Ingo, and Aaditya Mattoo. 2009. Weber, Sebastian, and Charles Wyplosz. 2009. "Is the Crisis Provoking Protection in "Exchange Rates during the Crisis." Services?" Bown, Chad P. 2009. "The Global Resort Notes to Antidumping, Safeguards, and Other 1. All data reported are from World Bank, Trade Remedies in the Economic Crisis." Global Development Finance, 2009. Chauffour, Jean-Pierre, and Thomas Farole. 2. The conference was financed in part by 2009. "Trade Finance in Crisis: Market the Global Trade and Financial Architecture Adjustment or Market Failure?" project, an initiative that is supported by Claessens, Stijn. 2009. "The Financial Crisis the UK's Department for International De- and Financial Nationalism." velopment. Summaries of the papers were Dhar, Biswajit, and Girish Srivastava. 2009. published in a World Bank-CEPR e-book "Restrictions on Mode 4 Access: Recent The Fateful Allure of Protectionism: Taking Stock Evidence." for the G-8 (available on www.worldbank.org. Evenett, Simon J. 2009. "The Devil is in the trade and www.voxeu.org); the full-length Details: The Implementation of Stimulus papers will be published in the World Bank's Packages and their Effects on Interna- Trade and Development Series in Fall 2009. tional Commerce." 3. See http://www.globaltradealert.org/ Foletti, Liliana, Marco Fugazza, Alessandro measure/united-states-america-dairy-export- Nicita, and Marcelo Olarreaga. 2009. incentive-program. "Smoke in the Water: How Much Do 4. See http://www.globaltradealert.org/ Countries Use Tariff-Related Policy measure/ec-reintroduction-export-refunds- Space?" milk-butter-and-butteroil. JULY 2009 PREMNOTE 9 5. See the reports on these measures at do not apply to government purchases of Global Trade Alert (www.globaltradealert. goods and services. org), the CEPR-led portal for online monitor- 7. Recall that the prevailing multilateral ing of trade-related measures taken during trade accords were negotiated on the basis of the current global economic downturn. an agenda set in 1986! Those born in that year 6. This Agreement is one of two agree- are now old enough to drive cars and vote. ments in the WTO where participation is 8. The desire to provide high-quality in- voluntary. Almost all developing countries formation that could be used to apply peer and some OECD countries have not signed pressure to governments was an important the procurement agreement. The reason a rationale for the CEPR to launch Global separate agreement is needed in the first Trade Alert (www.globaltradealert.org). The place is that the WTO does not cover public World Bank is one of five sponsors of this procurement; that is, the basic nondiscrimi- initiative. nation rules (MFN and national treatment) This note series is intended to summarize good practices and key policy findings on PREM-related topics. The views expressed in the notes are those of the authors and do not necessarily reflect those of the World Bank. PREMnotes are widely distributed to Bank staff and are also available on the PREM Web site (http://www.worldbank.org/prem). If you are interested in writing a PREMnote, email your idea to Madjiguene Seck at mseck@worldbank.org. For additional copies of this PREMnote please contact the PREM Advisory Service at x87736. PREMnotes are edited and laid out by Grammarians, Inc. Prepared for World Bank staff