Trade Winds—Has the Spectre of Protectionism Blown Away?

By Tamim Bayoumi

The global crisis has pushed trade reforms off—or at least to the edge of—the political radar screen. But shying away from improving the trade system in these tough economic times seems a little like cutting off your nose to spite your face.

The IMF’s First Deputy Managing Director David Lipton summed the issue up in a recent speech: “trade wars can put millions of jobs in jeopardy, while trade integration can be an engine of growth.”

Rising pressures

As the crisis has become protracted and unemployment remains stubbornly high in many economies, there are worrying signs that protectionist pressures may be on the rise. There are plenty of examples: recent actions by Brazil at the World Trade Organization (WTO) aim to use trade remedies to offset currency misalignments, China imposed duties on cars made in the United States, and legislation is pending in the United States to use trade measures to defend against “undervalued” currencies such as the renminbi.

But now is certainly not the moment we should be putting jobs and growth to the test.

Fortunately fears of a widespread resurgence of 1930’s-style trade protectionism after the 2008 financial crisis proved unfounded. This was thanks, in large part, to a shared responsibility by countries and institutions for the multilateral trading system.

Yet, our analysis reveals that advanced economies experiencing the largest increases in unemployment were also those most inclined to impose trade restrictions—as suggested by the number of cases of anti-dumping and countervailing duties initiated against China. In fact, we saw a big uptick in these measures in recent years (see chart).

Macroeconomic barometer

The Fund may not be the main player on the trade ‘block’, but we certainly take an interest given its macroeconomic importance.

In fact, prospects for the global recovery and impending risks to the multilateral trading system were foremost in our minds when, together with the World Bank and WTO, we held a trade conference—the first such event—in December 2011.

Fund staff presented two papers at the conference.

Changing Patterns of Global Trade examined the growing role of vertical integration through global supply chains. It highlights the importance of value-added analysis (as opposed to gross exports) in examining trade inter-linkages and implications for the response of trade flows to exchange rate changes.

Protectionist Responses to the Crisis: Damage Observed in Product-Level Trade found evidence that, while there was no widespread protectionist action and only a limited generalized impact on trade, protectionist measures did have a strong impact on trade in the particular products to which they were applied.

This brings me back to David Lipton’s point—now is the time to resist protectionist pressures and re-energize the process of trade integration. Trade should be able to contribute to, and not detract from, a global recovery.

Which way the wind blows

On this score, reaching agreement on the Doha Development Agenda—the broad deal launched in November 2001 to facilitate development through trade—remains important, and we need to explore fresh approaches to conclude it.

But the multilateral trade agenda needs to go beyond Doha and focus on new emerging issues, such as open regionalism and food and energy security. Without multilateral attention, these issues risk giving rise to unilateral “trade remedies” and deals among smaller groups.

Encouragingly, trade integration is regaining strength through bilateral and regional initiatives.

  • In October 2011, the United States ratified three bilateral free trade agreements with Columbia, Panama, and South Korea.
  • In November, nine Asia-Pacific countries embraced a groundbreaking regional trade liberalization deal known as the Trans-Pacific Partnership (TPP). Japan’s commitment to join the TPP talks is particularly important, marking a potentially historic milestone in opening up sensitive sectors. And, with the world’s third largest economy, the TPP would be the largest free trade zone, representing close to 40 percent of the world economy.

What’s in the wind?

And, in the spirit of moving forward the discussion, and indeed the policies in support of, trade integration, the IMF has three main lines of work in the pipeline.

  • In light of recent deleveraging by European banks, we launched in December an ad-hoc trade finance survey, in collaboration with the International Chamber of Commerce. The results will help us monitor risks to global trade credit and provide timely input into ongoing discussions by the Group of Twenty advanced and emerging market economies.
  • Global supply chains will be an ongoing area of work, looking more in depth at value-added trade flows and the implications for trade interconnectedness and exchange rate assessments.
  • Last, but not least, we are also developing a new index of protectionist pressure. The goal will be to summarize the key macroeconomic variables—such as growth rates, unemployment, imports, and exchange rate regimes—that help foreshadow protectionism. The index would be amenable to regular updates in line with revisions to the IMF’s global projections, and could thus serve as the Fund’s own gauge on trade winds. 

6 Responses

  1. Protectionism does not pay any economy in the long run. These strategies by the IMF are welcomed in order to keep the crisis at bay and enable young people around the world to have decent jobs!

  2. The United States of America, being the biggest importer of the world, is the only country in the comity of the nations which helps others sustain in the global import/export trade scenario. At the same time, it invests billions of dollars in research and development efforts, and countries like China and India straight away copy the products at no cost to them. Especially among the BRICs group, these two economies have been piling up gold and dollar reserves while their citizens remain poor and starving. Plus these so called emerging economies are emerging without investing money for providing safety nets i.e. health, education, food, medicine for their teeming millions in the interior.

    Not only this, but also the European economies like Germany, France and the UK are managing to survive at the cost of the U.S.A. This one country shares the burden of donations at the international level where the others are shying away. Whether it is a tsunami in Sri Lanka, floods in Pakistan or an earthquake in Haiti, America is foremost in sending humanitarian assistance which others don’t do. As a result, the present day economic woes of the USA are the obvious outcome.

    So, when you talk about globalization, please try to recognize these facts in the overall context of trade and aid. And also the IMF, it seems, is engaging mainly in bailing out the PIIGs countries in the euro zone in collaboration with the big European powers ignoring the fact that countries like Germany and France are thriving on massive arms-exports to smaller units like Greece for example. Definitely this is not going to help in developing the desired pattern of globalization of trade among the different countries of the world. My point is: these issues have not been highlighted in this article.

  3. Now is the time to resist unjustifiable protectionist pressures and re-energize the process of trade integration. Global recovery will be feasible only if there is an acceptable mix of protectionism and globalization. IMF is well placed to accelerate this mix. Sovereignty of the state needs to be properly tinged with sovereignty of reason.

    Inclusive development not only for BRICS but also for all those who inhabit this planet. In order to achieve this objective we need to have a reasonable balance of regionalism and internationalism.

    TPP is a good example to be followed by other members of IMF. If 40 percent of the world economy can become one zone, why can not we bring the rest of 60 percent within the same fold. IMF has a responsible role to play.

    We should be ready to face the challenges and make sincere efforts to avert storms and not let the creatures like unemployment, inflation, extreme poverty and nonproductive defence expenditures exhaust all our energies.

  4. Protectionism?

    Average Chinese border taxes on U.S. exports = 27% (10% tariff + 17% VAT)

    Average U.S. border taxes on Chinese imports = 1.1% (1.1% avg. tariff + 0% VAT)

    … hmmm… protectionism is clearly something that slows growth and creates high unemployment?!?!?

    Why is it that the IMF employs so many economists with such a tenuous hold on reality?

  5. […] Has the Spectre of Protectionism Blown Away? – The IMF Blog […]

  6. When you have outsourcing and offshoring it creates unemployment/underemployment as those (replaced) people will never find suitable work and it will continue to the next generation and so on. A country can choose to have protectionism but China and India will severely outprice on wages/products and the business elites will always choose the lowest possible costs. What needs to happen is to balance out cost and wages, and stop the greed!

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