Is protectionism on the rise during the crisis?

Hiau Looi Kee, Cristina Neagu, Alessandro Nicita 01 June 2010

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At the onset of the current crisis, government of major economies pledged to refrain from protectionist policies. The 13th paragraph in the closing joint statement at the G20 summit in Washington DC on November 15 2008 stated:

"We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing WTO inconsistent measures to stimulate exports".

Did the G20 break this pledge? Has protectionism been on the rise since the end of 2008? Has protectionism contributed to the “Great Trade Collapse” (Baldwin 2009)? The answers to these questions are clearly related to what we mean by the “barriers to investment or to trade in goods and services”, particularly whether we restrict the view to traditional trade policy (tariffs), or we expand it to include more diverse forms of trade policies. For instance, Baldwin and Evenett (2009) warned us of the increase in the use of murkier forms of protectionism, as during the Great Depression. Indeed, the findings of the Global Trade Alert reports indicate that countries have been proactive in implementing protectionist non-tariff measures (see for example, Evenett 2010).

Quantifying protectionism using the overall trade restrictiveness index

In our recent research (Kee et al. 2010), we analyse responses to the crisis in terms of tariff increases or anti-dumping duties. Focusing on these measures allows us to quantify protectionism in a concise and consistent manner by using the Overall Trade Restrictiveness Index (OTRI). In a nutshell, the Overall Trade Restrictiveness Index is a rigorous way to calculate weighted average tariff of a country, with weights reflecting the importance of each good in total imports and the responsiveness of the import of each good with respect to tariff. Its theoretical foundation was developed in Anderson and Neary (1994, 1996, and 2003) and was first brought to life in some of our previous work (Kee et al. 2008 and 2009).

Change in the overall trade restrictiveness index over the crisis period

Our findings indicate that, at least in tariff terms, G20 countries generally upheld their pledges. We found that rising protectionism has not been a widespread phenomenon. Tariff protectionism has increased only for a small set of countries. But these include some of the same countries that subscribed to the November 2008 pledge, such as Argentina, Brazil, Canada, China, Russia, and Turkey.

Figure 1. Change in tariff policies of countries from 2008 to 2009

Source: (Kee et al. 2010)

The rise of anti-dumping duties

Although the straightforward increase in tariffs might appear relatively simple, in practice the use of tariffs is often limited due to the lack of policy space – the impossibility of increasing tariffs due to WTO, regional, and bilateral commitments. A further restriction may be related to protecting the reputation of the country in the international trading system and fear of signalling beggar-thy-neighbour behaviour. As a result, anti-dumping duties are a WTO-consistent and often-used measure to grant domestic industry some temporary shelter amidst export competition.

The use of anti-dumping duties has been on the rise during the economic crisis. Indeed, for many countries such as the EU, India and the US, the use of anti-dumping duties has taken a prominent position among trade policy instruments. Despite this, the protectionist impact of anti-dumping duties, although large for the affected products, is generally confined to a very limited number of goods. As a result the impact of such measures on overall trade is generally small. Indeed, when we take anti-dumping duties into account, we find only a limited effect on the OTRI.

Figure 2. Change in tariff and anti-dumping duties of countries from 2008 to 2009

Source: (Kee et al. 2010)

Our calculations suggest that if we sum up all the negative trade impacts due to increased tariffs and anti-dumping duties, the world's imports may have decreased by as much as US$43 billion in 2009. In 2008, the value of world imports was about $11 trillion, implying that changes in trade policy may have decreased the world's imports by 0.4%. According to the latest estimate of the WTO (WTO 2010), the world's imports contracted by 24% in 2009. Thus our results indicate that trade policy changes can explain – at most – about 2% of the collapse in the world's import during the crisis period.

The estimated loss in export market access due to G20 changes in trade policy

Which exporting countries have been hardest hit by the G20 economies’ changing trade policies? One approach to examining the foreign market access effects of such trade policies is to use the Market Access Overall Trade Restrictiveness Index (MAOTRI). In a nutshell, the MAOTRI measures the average tariff faced by the export markets for a given country, taking into account the composition and responsiveness of trade. The focus here is on the bilateral tariffs and anti-dumping duties the G20 countries have imposed on their imports from any partner countries.

Results presented in Figure 3 show that the MAOTRI of many developing countries has deteriorated since 2008. The country that is most severely affected by the trade policy of the G20 countries is China. China’s MAOTRI increased by 1.6 percentage points, which translates to an estimated US$27 billion reduction in exports. Most of these new barriers for China are in the form of anti-dumping duties imposed on its manufacturing exports. Other countries that have experienced deterioration in market access conditions include Argentina, Brazil, Indonesia, Kazakhstan, Russia, and Ukraine. Jointly their loss in exports is about $1.4 billion. Besides the developing countries, the MAOTRI estimates that high income economies such as Norway, the US, EU and South Korea also have faced an increasingly adverse impact of crisis-era restrictions on their exported products.

Figure 3. Change in market access of countries in the G20 market from 2008 to 2009

Conclusion

Protectionism is neither the cause nor the consequence of the collapse in world trade since the global crisis started at the end of 2008. While some of the G20 countries have adjusted their tariff and anti-dumping duties during the crisis period, the immediate impact of such policies on trade is small. But history tells us that trade barriers are easily erected and much harder to take back down. Only time will reveal the long-run consequence of such protectionism. With the new crisis in Greece poised to spread across the Eurozone, protectionism may once again be tempting policymakers. As we all know, currency fluctuation has a more immediate and widespread impact on trade than trade policy adjustments, which often surgically target certain goods from a few countries. To the extent that the debt crisis in Europe manages to weigh down the euro, its depreciation will erode the export competitiveness of other major traders, including the US and China. The dog of protectionism may bark much louder the next time around.

Disclaimer: This column reflects the views of the authors writing in their personal capacity.

References

Anderson, James E and J Peter Neary (1994), “Measuring the Restrictiveness of Trade Policy”, World Bank Economic Review, 8(2):151-169.
Anderson, James and J Peter Neary (1996), “A new approach to evaluating trade policy”, Review of Economic Studies, 63(1):107-125.
Anderson, James and J Peter Neary (2003), “The Mercantilist index of trade policy”, International Economic Review, 44:627-649.
Baldwin, Richard (2009), The Great Trade Collapse: Causes, Consequences and Prospects, A VoxEU.org Publication.
Baldwin, Richard and Simon Evenett (2009), The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20, A VoxEU.org Publication.
Evenett, Simon (2010), “Africa resists the protectionist temptation: The fifth Global Trade Alert report”, VoxEU.org, 28 May.
Kee, Hiau Looi, Cristina Neagu, and Alessandro Nicita (2010), “Is Protectionism on the Rise? Assessing national trade policies during the crisis of 2008”, World Bank Policy Research Working Paper 5274.
Kee, Hiau Looi, Alessandro Nicita, and Marcelo Olarreaga (2008), “Import Demand Elasticities and Trade Distortions”, The Review of Economics and Statistics, 90(4):666-682.
Kee, Hiau Looi, Alessandro Nicita, and Marcelo Olarreaga (2009), “Estimating Trade Restrictiveness Indices”, The Economic Journal 119:172-199.
World Trade Organization (2010), “World Trade 2009, Prospects for 2010”, Press/598.

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Topics:  International trade

Tags:  international trade, protectionism, great trade collapse