Temptations of protectionism, too hard to resist: The cost for poor countries
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Remember the G20 commitment in November 2008, at the height of the financial crisis, to resist protectionist pressures? Well, according to a newly released report by Global Trade Alert – the brilliant independent monitoring system of policies that affect trade, led by Prof. Simon Evenett – many countries did not resist the temptation. This is hardly a surprise. In fact, one would have expected even more widespread protectionist pressures. What is a surprise comes from the key finding that least developed countries (LDCs) have been disproportionally affected. Without new trade distortive measures, the total value of LDC exports over the period from 2009 to 2013 would have been 30% higher, equivalent to US$265 billion of forgone trade (see graph below). While there were also trade liberalisation measures benefiting LDCs exports, they account for only 1/8th of the losses due to protectionism. And guess what? Two-thirds of these new protectionist measures were imposed by G20 countries, mainly from India (20% of the total of 494 measures identified by the report), but also from the EU and other emerging countries such as Brazil and China. Who would have thought that the BRICS, often portrayed as the friends of developing countries interests, would be hurting LDCs trade the most? And who could have guessed that the EU, which grants duty-free quota-free (DFQF) market access to all LDCs under its Everything-But-Arms (EBA) initiative, would also be part of the protectionist pack? Figure 1: Trade distortions reduced total LDC export growth by 5.5% per annum Source: Evenett and Fritz (2015). The main explanation comes from the smart way Simon Evenett and Johannes Fritz –the authors of this study financed the Swedish Ministry of Foreign Affairs – look at trade measures. Instead of simply focusing on traditional trade barriers like most others do, they also consider other market distortions that affect trade, like tax incentives and subsidies. Further, they not only consider measures directly targeted at LDCs exports (that are very limited in number), but also indirect effects i.e. those measures that affect the competitiveness of LDCs exports to a destination country due to third party distortive trade incentives . The authors estimate that close to 90% of LDCs exports are affected by export incentives received by foreign suppliers in third-country markets n particular from China, India and Brazil. Looking beyond direct trade barriers also explains why the EU is found to affect LDCs’ exports potential, in spite of EBA. In a recent event in Brussels to discuss the results, we learned that most of the EU’s trade distortive measures concerned agriculture, as well as some EU member states measures to bail out their industries. The implementation of the EU VAT Directive seems to have offered some leeway to distort trade (all elements that are unfortunately not discussed in the report). While all this has not prevented LDCs exports to the EU to increase by 90% from 2009 to 2013, according to Cécile Billaux from EU Trade Commissionaire Malmström’s Cabinet, the report tells us they could have done even better in the absence of trade distortive measures imposed since 2009. Any sense of optimism was immediately dashed by Simon Evenett, who brought some additional bad news: while the study stops at 2013, updated counts by Global Trade Alert show further increase in protectionist measures affecting LDCs since.
Why does it matter and what should be done about it?
- More transparent and comprehensive monitoring is clearly needed. The current system is not sufficiently transparent, and too narrow. The WTO could do better in that respect. Close to two thirds of WTO member states do not supply information on their trade policy changes, leading to severe under-reporting of protectionist as well as liberalisation measures. We need to look beyond direct trade barriers, to consider beyond the border, including fiscal measures.
- LDCs exports further suffer from erosion of preferential margins. With the proliferation of free trade agreements and the prospect of mega-regional deals (think TPP and TTIP), trade preferences granted by many more advanced and emerging countries to LDCs have a lower rate of return, as LDCs exports have increasingly to compete with products that receive similar, when not more, preferential market access than they do. This is a fact of life that LDCs had better get used to, and is no reason to stop multilateral, regional and bilateral free trade. But it is a reason, among others,
(i) to prefer the multilateral approach, where efforts should be concentrated on;
(ii) to enhance preferential schemes to LDCS - read DFQF for all LDCS under the WTO (unlikely to be agreed though) and simplified rules of origins (also facing strong resistance); and
(iii) to limit the potentially negative effects of FTAs on LDCs – including by extending recognition of standards, rules of origins and allowing cumulation across preferential regimes, and by providing support measures.
- G20 and the international community commitments to fight protectionism should be taken more seriously. The adoption of the SDG post-2015 agenda in New York in September provides an excellent opportunity for this, in line with SDG 17.11 which pledges to “increase significantly the exports of developing countries, in particular with a view to doubling the LDC share of global exports by 2020”, as well as SDG 17.12 on DFQF and simple and transparent rules of origin, as mentioned above. G20 leaders could strengthen their pledge at their Summit in Antalya in November, which would give the impetus for endorsement at the 10th WTO Ministerial Conference in Nairobi in December. It is not like opportunities are missing in 2015 however the political will is. The light of hope is that protectionism is not only affecting LDCs exports, but G20 exports – and in particular from the BRICS. So, self-interest might serve LDCs concerns well.
- Consider more carefully trade measures in the context of economic transformation and industrialisation dynamics for sustainable and equitable growth. Trade is only a mean to an end. While some of the measures decried in the Global Trade Alert obviously distort trade, some have been pursued with industrialisation objectives in mind, by G20 countries, and BRICS in particular, but also increasingly by other developing countries, including LDCs. Think of local content and even export incentives, as part of industrial strategies. Having a better understanding of the positive and negative effects of such measures, on trade and industrialisation processes, should become of greater concern, away from ideological stances too often prevailing in these debates.