The crisis and protectionism: Steps world leaders should take

Richard Baldwin, Simon J Evenett, 4 December 2008

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When incomes, investment and jobs are under threat, national governments try to cushion the blow – in part by erecting new trade barriers. This time is no exception. According to the latest data from the WTO and ITC, the number of antidumping cases jumped 40% in the first half of 2008 and many nations have already raised tariffs in 2008.

The magnitude of the new protection is modest. However, as the recession spreads and deepens globally, this could change – especially if world leaders lose control of the situation; protectionism and competitive devaluations could trigger a vortex of beggar-thy-neighbour policies.

The universal respect of WTO rules and 60 years of tariff negotiations make a repeat of the 1930s tariff war unlikely. But a WTO-consistent protectionist cycle is a real possibility. Indeed, just such a thing happened on a small scale in the last major financial crisis – the 1997 Asian crisis.

A new VoxEU.org Ebook

To address the question of what world leaders should do to prevent the spread of protectionism, we assembled 17 leading trade scholars from around the world to write short essays on the question. The resulting Ebook, “What world leaders should do to halt the spread of protectionism” is aimed the world’s trade ministers who are likely to gather in Geneva next week in an attempt to rescue the WTO negotiations known as the Doha Round.

How bad could a WTO-legal tariff war be?

Even without violating WTO-rules and commitments, things could get pretty bad in the worse case scenario, and bad in a more middle-of-the-road scenario. The precise figures come to us from Bouet and Laborde (2008) and are shown in Table 1.

If all nations put their tariffs up to their bound rate – i.e. the WTO tariff ceilings that they are committed to respecting – then exporters from middle- and high-income nations would faces tariffs that were on average twice as high as they are now; those facing poor nations would triple since they tend to export agriculture goods where tariff bindings are astronomically high or nonexistent. If a vortex of beggar-thy-neighbour moves pushed tariffs ‘only’ up to the maximum level that nations had applied over the past 13 years (i.e. since the last WTO Round was signed), then figures would be more like 50% higher and 100% higher for the groups.

Table 1: Tariffs on high-, middle- and low income nations: status quo vs. bound rates

  Protection faced by exporters from:
  High-income Middle-income Low-income
Status quo 4.6% 4.6% 4.0%
Tariffs raised to bound rates 9.0% 8.9% 11.7%
Tariffs raised to maximum of past 13 years 6.5% 6.3% 7.3%

Source: Bouet and Laborde (2008).

And beside tariffs and “fair trade” duties, governments can discriminate against foreign goods in WTO-legal ways using policies that are justified in the name of health, safety, and environment requirements.

Hope and fear: the need for action

But not all is bleak. The global crisis is an opportunity as well as a threat. It often takes a crisis to break the status quo and allow a new, better, more cooperative equilibrium to emerge.

The essays – which were written in the first week of December with a minimum of coordination – provide a surprisingly consistent response. Authors differed on many points, but three policy recommendations recurred:

  1. Macroeconomic initiatives are the best way to fight this crisis, not protectionism.
  2. APEC and G20 leaders’ words should be translated into deeds by agreeing a framework that will allow completion of the Doha Round.
  3. World leaders should establish a surveillance mechanism to track any new protection, whether it is WTO consistent or not.

These essays will be of interest to anyone with a stake in the world trading system and are topical given that a WTO ministerial meeting is expected to start at the end of next week in Geneva.

The authors

Richard Baldwin, Jagdish Bhagwati, Ann Capling, Wendy Dobson, Peter Draper, Simon Evenett, Gary Hufbauer, Douglas Irwin, R V Kanoria, Bob Lawrence, Patrick Messerlin, Kevin O’Rourke, Arvind Panagariya, Yung Chul Park, Hadi Soesastro, and Jeffrey Schott.

The Book

This book is available to download for free. For more information, click here.

References

Bouet and Laborde (2008). “The cost of a non-Doha,” IFPRI Briefing Note, November 2008. http://www.ifpri.org/
Baldwin, R and Evenett S. (editors) (2008). What world leaders should do to halt the spread of protectionism”. A VoxEU.org publication.

Topics: International trade
Tags: beggar-thy-neighbour policies, Doha Round, tariff war, WTO, WTO-legal tariff war.

Professor of International Economics, Graduate Institute, Geneva; Director of CEPR; VoxEU.org Editor-in-Chief

Professor of International Trade, University of St. Gallen and Member of the Warwick Commission on the Future of the Multilateral Trading System after Doha. Co-Director of the CEPR Programme in International Trade and Regional Economics.