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World trade at the turn of the decade

Razeen Sally

Nations must resist protectionism and get on with trade liberalisation and structural reforms.

World trade is recovering from its steepest fall since the 1930s—part of the biggest “deglobalisation” since the Great Depression. But trade liberalisation had already stalled around the world before the crisis, which, predictably, increased all-round defensiveness.

The gap has also narrowed between the West and emerging markets. An anaemic recovery and pervasive gloom cloud the West; roaring growth and sunny optimism brighten emerging-market skies.

Given a new year, let’s try to make sense of the post-crisis state of play in international trade and take a forward look at global trade policy.

The West’s financial crisis translates into a deeper-than-normal recession and a slower-than-average recovery. In contrast, most emerging markets retained reasonably solid banks and balance sheets. That enabled them to rebound quickly, not least through fast “reglobalisation”.

According to the International Monetary Fund, trade volumes for emerging and developing economies increased by more than 13% in 2010, compared with a 10% to 11% increase for advanced economies. According to the United Nations Conference on Trade and Development, foreign direct investment (FDI) to developing countries shrank much less than it did in the West in 2009. Inward and outward foreign direct investment for China and India remained buoyant in 2009 and have increased significantly in 2010.

The crisis also opened a new chapter of Big Government. This is more evident in domestic “crisis interventions” (financial sector bailouts, fiscal stimulus packages and easy-money policies) than in trade policy.

Interventions
The effects of crisis interventions are likely to be far worse in the West than in emerging markets. They leave oceans of public debt that portend higher taxes and real interest rates, in addition to inflationary threats.

They have also given cover to arbitrary intervention by politicians and bureaucrats and created long-term entitlements. This will stifle private-sector incentives to save, invest and innovate, and it will restrict competition and raise costs for businesses and consumers.

The news is much better on international trade—the world has not hurtled into tit-for-tat protectionism. As the World Trade Organisation (WTO) notes, obvious protectionism, mainly border trade barriers, have affected just over 1% of international trade. But this does not take account of non-traditional, non-border protectionism—mainly complex domestic regulations that spill over the border and discriminate against international trade.

Many crisis interventions fall into this category—intrusive new financial regulations that affect cross-border finance, public procurement restrictions, industrial subsidies, and onerous product and process standards, including environmental standards to promote renewable energy and combat climate change. Regulatory protectionism is more opaque than traditional protectionism and much less constrained by WTO rules.

The danger is that, if not contained, it will spread gradually to cover bigger swaths of international trade. That is what happened in the 1970s and early 1980s and resulted in industrial overcapacity, and delayed global recovery and globalisation.

Now turn to the leading players in trade policy, starting with the United States and European Union. Both are defensive. Economic weakness at home translates into weakness abroad. Trade comes very low down the list of White House priorities. President Barack Obama is not an instinctive free trader and has powerful protectionist forces inside his tent, notably the unions. Indeed, this is the least free-trade minded administration in the US since the Carter administration.

Open-market initiatives
Above all, the administration is not leading with open-market initiatives. The US is abrogating its traditional leadership role in world trade. This leaves a global vacuum, for there is no substitute leader to open markets and strengthen trade rules.

The picture in the EU is similar. The EU’s single market is weighed down by sovereign-debt crises, malfunctioning banking systems, industrial strife, sclerotic labour markets, bloated welfare states and intergovernmental squabbling. When “Eurosclerosis” happened before, in the 1970s and 1980s, EU trade policy turned to navel-gazing and protection against outsiders. That is the risk today.

China is now one of the Big Three in world trade, alongside the US and EU. Liberalisation has stalled since about 2006, corresponding with industrial policy measures to promote state-owned enterprises. China’s crisis response—essentially an investment binge—bolsters the public sector and state power at the expense of the domestic private sector and foreign multinationals.

This exacerbates China’s structural fault line of over-investment and under-consumption. And there is the real risk of surplus manufacturing capacity flooding into shrinking export markets in Europe and North America, thereby inviting protectionist retaliation against China.

Commendably, the Beijing leadership has not rocked the boat too much during the crisis—it has not resorted to a big increase in protectionism. But stalled the trade and foreign direct investment liberalisation, the absence of domestic structural reforms and creeping protectionism threaten to create future trade tension.

Global pattern
Other large emerging markets, notably India and Brazil, reflect a worldwide pattern—stalled liberalisation at home, a slight increase in crisis-related protectionist measures, but no major reversal of previous market-opening reforms. Russia remains the most protectionist of the Bric nations (Brazil, Russia, India and China) and is likely to join the WTO this year.

Turning to the WTO, the Doha Round on reducing trade barriers remains stuck. Besides, even if concluded, its results would be very modest—it would do next to nothing to combat emerging regulatory protectionism.

The first objective must be to finish the Doha Round as soon as possible, however modest the result, and then move on to a post-Doha agenda that addresses 21st-century trade realities. But breaking the WTO’s log jam requires filling a leadership vacuum left by the US, EU and main emerging markets.

Finally, the G20, like the G8, has proved ineffective on trade policy. At best it can be a useful chat forum. But deep-seated differences among members will prevent “hard coordination”—that is binding, enforceable rule changes.

Overall, the short-term challenge is to arrest the slide to Big Government at home and creeping protectionism abroad. The medium-term challenge is to get back on track with the liberalisation trade with foreign direct investment combined with domestic structural reforms—there was substantial unfinished business left before the crisis struck.

That is primarily a matter for unilateral action by governments and competitive emulation among them. It can be reinforced by international policy cooperation in the WTO and G20, but not too much can be expected of cumbersome global-governance mechanisms.

Razeen Sally is director of the European Centre for International Political Economy, senior lecturer at the London School of Economics and senior research associate at the South African Institute of International Affairs.

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