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Legal Trade Barriers Must Be Kept in Check

Authors: Jagdish N. Bhagwati, and Arvind Panagariya, Professor, Indian Economics, Columbia University
June 12, 2009
Financial Times

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It is a common complaint that, despite the repeated calls by heads of the Group of 20 leading nations to prevent an outbreak of protectionism in the wake of the current crisis, many member countries have charged ahead with protectionist measures anyway. But it is wrong to conclude that the G20 is crying in the wilderness, or that it is hypocritical.

For it is necessary that we do not put into the same hopper both illegal and legal protectionism. The former, in the few instances where it has arisen, is deplorable. The latter, more frequent form, is less clear-cut as it consists of actions agreed at the World Trade Organisation as legitimate under certain circumstances Ė which surely include political stress during a macroeconomic crisis. It therefore calls for a different strategy from mere exhortation and condemnation if it is to be moderated.

The best-known examples of illegal protectionism are the subsidised loans and other assistance provided to the car industry by the US, France, Canada, Australia and Brazil. These are sector-specific, explicit subsidies that are not prohibited outright but will almost certainly be challenged and found to break WTO rules. It is interesting that these measures have been adopted even by Barack Obama, who has promised to adhere to the rule of law, unlike his predecessor.

The US president and other leaders have not seriously considered giving carmakers another type of support that legal experts say is less likely to break WTO rules. This would be a non-discriminatory subsidy on the purchase of cars that would kick in whether an American buyer bought a Detroit car (say, a Buick from General Motors) or a Japanese transplant (a Honda from Ohio), or an imported one (a Mercedes produced near Stuttgart).

We must also include measures that are legal as enacted but illegal as implemented. This has been the case with the "Buy American" provisions in the US stimulus package. State and local agencies find it difficult to determine precisely what is exempt from the provision and therefore apply the rules indiscriminately in practice.

The illegal measures undermine the rule of law that is one of the crowning achievements of the WTO system after the free-for-all proliferation of trade barriers in the 1930s.

But the WTO system allows for legal protectionism. Principally, the rules enable countries, in certain situations, to "safeguard" domestic companies from foreign competition, take anti-dumping actions, raise tariffs from current towards maximum levels (as Mexico did during the 1994 peso crisis, for instance), and discriminate in government procurement (the US administration, for example, can exclude India, Brazil, China and other non-signatories of the government procurement code from access to its purchases of goods and ≠services).

Safeguard actions have been relatively few (11 during 2008 and nine in 2009 until March 25). Anti-dumping initiations have risen to 207 in 2008 from 163 in 2007, though they are well below the peak of 366 in 2001. Tariff rises have taken place in footwear (Kazakhstan, Ecuador), steel (India, Indonesia, Vietnam, Russian Federation) and cars (Russian Federation).

We know that several of the "legal" provisions that allow protectionism were accepted to help liberalise trade. You will not liberalise unless you have an exit strategy for when the going gets tough. But the danger, of course, is that if countries used the exit provisions indiscriminately, they could undermine the liberal trading system itself.

How do we then stop the open trading system from careering towards a legal protectionist train wreck? An important answer can be found in the fact that if one country indulges in an unwise protectionist measure, others can retaliate with their own. In a highly interdependent world economy, as we have today, exporters dread retaliatory protectionism, such as Canadaís recent riposte to the Buy American provisions.

Where exhortation will not work, the threat of retaliation will. To contain the indiscriminate spread of legal protectionism, let us encourage the prospect of retaliation. While in principle retaliation could lead to a trade war, we believe its deterrence effect will dominate and a return to the 1930s is unlikely. Countries would avoid taking the road to mutually assured destruction.

The authors are professors at Columbia University and Jagdish Bhagwati is also senior fellow at the Council on Foreign Relations.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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