Comments from Ed Gresser, 08- 8-2010

RISING PROTECTIONISM? 

Edward Gresser

Democratic Leadership Council

Washington International Trade Association

 

January 7, 2010

 

 

            Thanks to WITA and Jim Wilkinson for hosting this event, to the German Marshall Fund and Congressman Kolbe for their support and to Simon for this very interesting report.

 

INTRODUCTION:  TRADE TRENDS 2009

 

            Let me begin by noting that we are in a period that while not unique for trade is more or less a once-in-a-century affair.

 

            On Tuesday I looked back at our trade data over the past sixty years.  They show seven annual declines in trade since the Second World War.  The largest was a 6.4 percent drop in 1949; the second, a 3.7 percent drop in 1975. 

 

-           Last year, American imports likely dropped from about $2.5 to $1.8 trillion.

-           WTO data suggest a comparable drop in worldwide trade, from about $16 trillion to $12 trillion. 

 

That means this year’s drop will likely be 30 percent or perhaps a bit less – either way the steepest drop since 1938, easily comparable to the drop in 1930, and larger than the declines in trade during the first years of our Civil War, World War I and World War II.

 

            This happens, of course, in the context of a financial crisis and severe economic contraction – the type of environment that opened the Great Depression in 1930, and has for good reason awakened fears that countries would behave as they did in that period.  As we recall, or at least as our great-grandparents experienced, most governments used policy, at least taken altogether, to make things worse rather than better by devaluing currencies, raising tariffs, creating new import licensing programs and in other ways walling one other off.  Most governments, joined by the international institutions like WTO, IMF and World Bank, have been consistently warning others against repeating the experience.

 

            As Simon has noted the G-20 members have repeatedly pledged to avoid doing so, as well as to conclude the Doha Round.

 

            How well have they done?  The decline in real-world trade raises the question of whether they are living up to their pledges; and the GTA is an innovative and very interesting tool in helping to answer the question.

 

            We have some reviews of trade restriction, in particular the WTO’s very interesting and comprehensive publication.  GTA does not simply duplicate this, but adds

 

(1)        Some life and color and instantaneous reaction through a continuously updated database on trade policy decisions as they happen;

(2)        Reporting on which countries appear to be damaged by protective or discriminatory actions;

(3)        And analytic articles covering the larger environment and decisionmaking in the United States, Europe, Latin America, Japan, China et al.

 

            The report is on the face of it alarming and negative, concluding that governments have joined to create a ‘protectionist juggernaut’ involving 297 beggar-thy-neighbor policy measures since the first G-20 crisis summit in November 2008.  But I feel much more positive about their actions, on four basic grounds:

 

-           The protective or discriminatory decisions to date are relatively minor, and some of the ‘protective’ decision cited in the report are not, I believe, really protective at all;

 

-           The bigger strategic policy framework of the major economies is one that has proven fairly strong and capable of keeping markets open;

 

-           The major trends outside policy tend to make the world more integrated and open as time goes by, especially through innovation in telecommunications and logistics;

 

-           Real-world trade trends suggest that protective decisions so far have not, in contrast to those of the 1930s, blocked a recovery of trade.

 

1.  PROTECTIVE DECISIONS TO DATE ARE MODEST

 

            I begin with the nature of the protective or discriminatory policy decisions taken so far.  The GTA report cites 297 of these, taken by most of the world’s economies and injuring most of the world economies in one way or another.  Two points here.

 

-           First, we have to be careful:  not all protectionism is major and important.  Not all discrimination is protectionism.  And not all discrimination is obviously bad and wrong.  For example:

 

            The report notes bailouts and subsidies as the most common form of protectionism or discrimination.  They can come in this form, but shouldn’t automatically be classified as such.  For example, the GTA’s most recent red-flag for a United States action came on Tuesday, in the administration’s decision to give additional support to GMAC, the auto financing company.  This, I suppose, can technically be called ‘discrimination,’ as the support goes to an American company but not to others.  But it is not a decision that I think should be labeled “protectionism,” or considered damaging to either trade in general or the interests of any particular foreign countries.

 

The GMAC decision is part of the larger US government policy of preventing a collapse of the financial system in general.  I don’t know much about this case in particular, but in general it is a good idea to prevent the financial system for collapsing.  If the American financial system were to collapse, the damage to trade, and to the U.S. and global economies in general would be very large.  Decisions intended to stop this from happening can be debated on the merits, but should not really be classed as “protectionism.”

 

            Likewise our most recent amber-box warning came when Congress renewed the Generalized System of Preferences just before Christmas.  It is true that the GSP is somewhat discriminatory, as it gives tariff breaks to jewelry made in Thailand that Chinese jewelry doesn’t receive, or to South African goods that aren’t applied to Belgium.  But the GSP is not at all protectionist, has been in place for 35 years, and in general the discrimination victims aren’t complaining and trying to abolish it.  In fact personally I would argue that it is a positive and trade-liberalizing thing.

 

-           Second, the large number of decisions needs to have a point of comparison.  The catalogue of discriminatory actions is probably an original thing with GTA, but we do have a lot of data on anti-dumping and other trade remedy actions.  Here – if for the sake of argument we take these as deliberate policy decisions by governments, rather than as quasi-judicial execution of existing law – we see a rise in ‘protective actions,’ but not something not far removed from the typical spike we see during recessions.

 

-           Worldwide, the WTO finds anti-dumping cases at about 200 per year between 2003 and 2008, and it seems likely that this year’s total was significantly higher.  But at the turn of the century, around the Asian financial crisis, the WTO was counting 250-350 AD actions per year.  So an increase from recent levels is not out of line with historic levels.

 

-           Likewise in the United States, the ITC lists 34 AD and CVD cases filed through November.  This is a big jump up from the 10 cases of 2006 and the 15 cases of 2005.  But even if there are some more in December, the total is roughly comparable to the post-1979 average of 43 cases per year, and well below the real historical spikes to 77 cases filed in 2001 and the 82 cases in 1983.

 

-           So the trade remedy actions seem to me typical of those in earlier recessions in the 1970s, 1980s, 1990s and the last decade, rather than those of the 1920s and 1930s.

 

-           And third, we have the case of procurement and ‘buy-local’ programs.  Here the best-case scenario is for all countries to open their stimulus to international bidding.  But we live in a non-best-case world in which only 14 wealthy economies are bound to open procurement to one another through the WTO’s Government Procurement Agreement, and at least in the U.S. case the administration has made sure that buy-American rules are within the framework of our WTO obligations and the obligations of bilateral FTAs.  And the worst-case world is one in which governments refuse to do stimulus at all and let demand collapse - in which case trade collapses anyway.   The main thing is to provide some temporary fiscal support for growth and employment, which almost all the big economies have done.

 

2.  TRADE RULES FRAMEWORK STRONGER THAN RECOGNIZED

 

             Now let me move to my second point.  This is that we can contrast the broad framework of policy today with that of the 1930s, and the contrast suggests to me that the world is not in the midst of a genuinely big protective surge.

 

            The protectionism of the 1930s had roots in the previous decade.  Several countries were extreme cases in which powerful autarkic ideologies took hold – and these were great countries and very large parts of the global economy.   The democracies too were tending to draw back from integration during the 1920s, notably through the Fordney-McCumber Act in the United States and Imperial Preference legislation in Britain.

 

            Then in the 1930s the protectionism that followed the 1929/1930 crisis was not a set of episodic decisions limited to particular products or countries and advanced through spates of anti-dumping cases or procurement of wind turbines from China.  They were very broad and comprehensive decisions to limit economic engagement with the world.  The Smoot-Hawley law in 1930, which is most famous here, covered a very broad range of products:  textiles and clothes, metals, scientific instruments, corn, rice, oysters, steel, silk, violins, leather, imitation pearls, and lots more, all at once, for all countries, and permanently.  Britain did something not quite so extreme, but still very comprehensive; France added a lot of import bans and quotas.

 

            Today no major economy has taken a genuinely systemic and comprehensive decision to close markets.  The protective steps they have taken are, at least in their view, within the bounds of their WTO obligations (and when relevant of their bilateral or regional agreements).  Equally significant, countries when injured by these decisions are using the dispute settlement mechanisms for redress rather than simply retaliating quickly.

 

            And as they make these decisions, no major economy seems at risk of adopting even a moderate autarkic ideology.  Instead they are building on the trends of the last decade, which despite the Doha stalemate was for the WTO rules to extend to a broader reach of countries and for world markets to become somewhat more open –

 

-           Through the WTO accessions of China, Taiwan, Vietnam, Saudi Arabia, Cambodia, Nepal and others;

-           And also through the end of sanctions on Afghanistan, Libya and Iraq.

 

            Perhaps significantly, the country GTA finds using the most protectionist measures is Russia – the only country outside the rules.

 

-           So to my impression the set of rules is holding up, and the broad policy framework of the major economies is tending to keep the world markets open.

 

3.  LONG-TERM FACTORS ENCOURAGE LIBERALIZATION

 

-           Third, if this remains the case, in the absence of any particular policy to open or close markets the tendency of the world economy is to become more integrated and liberalized.   This is because of at least three factors which are outside the world of policy and to some extent outside the control of governments altogether –

 

-           Peace among the major economies:  no conflict between the U.S., Europe, China and Japan, nor for that matter bringing Canada, Brazil, India, Russia, Korea, Australia, Taiwan, Argentina, Mexico or the ASEAN members into conflict with a big economy or with one another.

 

-           Technological change:  deployment of fiber-optic cable, telecommunications satellites and internet capacity is steadily reducing the cost of moving services and information around the world, and easing the task of managing multinational supply chains.  Here in the US, the cost of an international phone call has dropped by 80 percent in this decade, from about 49 cents per minute in 2000 to now about eight cents.

 

-           Logistical innovation and growth:  The world’s container-ship capacity has tripled from 4 million to 12 million TEUs, and for several years to come will be adding a million or more TEUs each year.  So it becomes easier and often cheaper to ship goods around.

 

AND BACK TO TRADE TRENDS

 

            All this suggests to me that the trading system is pretty strong and successful so far and that we are not in the midst of a major protectionist surge.  The system is not immune to challenge, it requires some discipline and courage from governments in bad times, but it does not require saintliness and sea-green purity.   On the whole I think the governments have done pretty well.

 

            So let me turn finally back to real-world trade trends.  And as remarkable as the trade contraction last year was, a closer look suggests that the worst period may be behind us.  Two points –

 

-           U.S. trade data show our own decline in trade stopping in the summer and now beginning to rebound.  Both imports and exports, as of last October, were at their highest levels since November 2008.

-           WTO data likewise show a rebound, as exports dropped from about $4.3 trillion in the fall of 2008 to $2.7 trillion in the spring of 2009, but then revived to about $3.2 trillion in the third quarter 2009.  This does not come from a jump in energy prices or some similar supply-shock, but instead from a modest lift in exports in each major world region.

 

            Anyone who has read Charles Kindleberger’s book on the crisis period will remember the graph that looks like a spiderweb:  trade began falling after the financial crisis in late 1929, then continued to fall for four consecutive years, ultimately from $62 billion to about $24 billion.  That does not now seem to be happening.

 

TWO QUALIFICATIONS

 

            Having said all this, there are some reasons for caution.

 

            There are some high pressures within Congress, particularly relating to the relationship with China.  I also think there is a general feeling not only in the United States but among many other economies that China needs to do more on currency valuation.

 

            And we do not quite know how to forecast public opinion.  We have unemployment here at a 25-year peak of above 10 percent, and we do not have any experience that tells us how the public will react to a prolonged period of intense suffering and anxiety should it remain at high levels for some time to come.  To date, the experience has not damaged public support for open markets – on the contrary, major public-opinion surveys like Pew, the New York Times/CBS and Gallup all show a noticeable rise in support for trade policy – but we do not know what the future will bring.

 

CONCLUSION

 

            In general, then, on balance the record seems to me to suggest that governments are doing a pretty good job.  The conventional-wisdom lessons of the 1930s are that –

 

-           Governments should not let banks and financial systems collapse;

-           Governments should not bring about a collapse of trade through broad protectionism, and should do their best to avoid protective actions in general.

-           Governments should provide some fiscal support during the worst of the crisis to keep unemployment from skyrocketing, moderate extreme suffering, and ultimately to dampen potential for radicalism.

 

            On the whole they are doing that, in trade as in other areas.  It is not easy.  So they deserve a bit of sympathy and applause every once in a while.

 

-           Finally, I have reached some different conclusions from Mr. Evenett.  But in part I have used the information GTA provides to do it.  It is a really good service and innovation that I recommend highly and hope gets wide readership.

 

-           Once again, my thanks to Simon, to WITA, to Congressman Kolbe and to the German Marshall Fund for this chance to discuss an important topic and meet with all of you today.