TRADE TRADE - TRADE notes TRADE by ldd0229


                                                                                                                                                 MARCH 2, 2009
                                                                                                                                                   NUMBER 37

          Trade Protection: Incipient but
               Worrisome Trends
    Elisa Gamberoni and Richard Newfarmer
                                                      Several countries have adopted new
With the global economy teetering on the                   protectionist measures…
abyss of severe recession, political pressures
demanding      protection    from      import
competition to protect employment are          Since the beginning of the financial crisis,
surfacing with increasing intensity around     officials       have             proposed               and/or
the world. However, if there is one lesson     implemented roughly 78 trade measures,
from the experience of the 1930s that is       according to the World Bank’s monitoring
suddenly relevant, it is that raising trade    list of trade and trade-related measures. 1
barriers merely compounds recessionary         Of these, 66 involved trade restrictions,
forces – and risks pushing the economy into    and        47    trade-restricting                    measures
prolonged contraction.                         eventually took effect (Figure 1). The
                                               trade effects of these measures are
For this reason, G-20 leaders signed a difficult to evaluate because of the
pledge on November 15, 2008, to avoid prevalence of non-tariff border measures,
protectionist measures.      However, since subsidies and contingent
then, several countries, including 17 of the
G-20, have implemented 47 measures whose
effect is to restrict trade at the expense of
other countries. While the trend is of
                                                      Trade restrictions are numerous…
concern, to date these measures have
                                                 Figure 1
probably had only marginal effects on trade.
The sharp contractions in trade volumes                 Mesures taken from October 2008-February
                                                      Measures taken from October 2008- February 20092009
evident in recent months are a consequence                          (number of measures)
                                                                    (number of measures)
not of protection, but of the global recession
                                                   50                  -------Trade restricting-----
and financial feedbacks through sky-               45
rocketing costs of a shrunken pool of trade        40
finance. Nonetheless, the trend in protection      35

is up and the full effects recession have not      30

yet been felt. Trends are a source of concern      25
and worthy of constant monitoring.


                                                              proposed w/o decision   implemented            rejected             liberalizing

                                                         Source: World Bank staff based on public information and published press reports.
                                                         Excludes anti-dumping cases.

TRADE NOTE #37                                                                                                                                            PAGE 1
protection – a task that nevertheless remains  Export subsidies are particularly egregious
to be done. Although the effects of these      because they contravene the draft Doha
measures so far are probably minor relative    modalities.   The EU announced new
to size of unaffected markets, they are of     export subsidies on butter, cheese, and
considerable importance for particular         milk powder. Less obviously, both China
exporters shut out of protected markets.       and India have increased the rebate on the
                                               duty drawback system for exporters, and,
Tariff increases comprise only about a third although the subsidy component is a
of these actions and a half for developing matter of discussion, the timing of these
countries (Figure 2). For example, Russia measures raises questions.
raised tariffs on used autos, and Ecuador
raised tariffs on more than 600 items. Non- Subsidies proposed for the auto industry
tariff measures include such policies as have proliferated and total some $48
Argentina’s imposition of non-automatic billion worldwide, mostly ($42.7 billion)
licensing requirements on auto parts, in high-income countries. In addition to
textiles, TVs, toys, shoes, and leather goods, the US direct subsidy of $17.4 billion to
or Indonesia’s requirement that five its three national companies, Canada,
categories of goods (including garments, France, Germany, United Kingdom,

             Rich countries subsidize… Poor countries use barriers
  Figure 2
                                       Types of measures

                 Developed countries                          Developing countries

                                                           and other
                        Subsidies                                                    Import
                        and other                                                    duty
                        support                                                      49%
                                                           9%     NTM

                        N = 12                                         N = 35
      Source: World Bank staff based on public information and published press reports.
      Excludes anti-dumping cases.

footwear, toys, electronics, food and              China, Argentina, Brazil, Sweden and
beverages) would be permitted in only five         Italy have also provided direct or indirect
ports and airports. In some countries,             subsidies – not including Australia’s
tightening standards have slowed import            support to its car dealers and South
entry, including, for example, China’s             Korea’s and Portugal’s support to their
import ban on Irish pork as well as rejection      component suppliers. To the extent that
of some Belgian chocolate, Italian brandy,         the industry is laden with excess capacity,
British sauce, Dutch eggs and Spanish dairy        these subsidies impede exit and delay
products; and India’s ban on Chinese toys.         adjustment. Even worse, subsidies may be
                                                   linked to requirements that companies to
TRADE NOTE #37                                                                                   PAGE 2
preserve domestic employment, even at the        EU in December 2008 imposed duties on
cost of shutting more efficient plants abroad    preserved fruits from China as well as on
in developing countries. (In the case of the     imports of welded tubes and pipes of iron
European Union, state aids may not be            or non-alloy steel from Belarus, China and
conditional on the location of supported         Russia.
economic activities or employment). To
prevent this, governments may react to the        Trends in agriculture, finance and
policies of neighbors – so, for example,         labor movement deserve watching…
Canada has matched the subsidies the US
gave Detroit auto makers to ensure that
Canadian plants of American producers            Protection to agriculture may not require
would remain open.                               new measures because existing laws
                                                 automatically provide increases in
A remarkable trend emerging from these           subsidies with declines in agricultural
actions is the reliance of developed countries   prices. Many programs – in the EU, US,
on subsidies rather than border barriers,        Japan, South Korea, to name a few – entail
while developing countries have deployed         price supports, so when commodity prices
all forms of protection (Figure 2). This         fall, direct payments to producers
undoubtedly is testimony to the superior         increase. For example, we estimate that
financial strength of public budgets in          US overall trade distorting subsidies of
developed countries.         However, once       about $8.1 billion in 2008 are likely to rise
economic pressures to stimulate economies        to $9.9 billion in 2009 if current price
are replaced with inevitable needs to reduce     projections materialize. 2 Trade distorting
deficits, this pattern may portend equally       subsidies push the global burden of
severe pressures to wall off trade               adjustment onto commodity producers in
competition.                                     Africa, Asia, and Latin America where
                                                 governments do not have resources to
    Anti-dumping cases are on the                match subsidies of the wealthier countries.
                                                 These measures also ignore the
                                                 protectionist bias in the financial sector.
These numbers do not include antidumping         While serving the urgent public purpose of
measures. After a period of slowdown, the        reestablishing financial stability, virtually
number of antidumping cases (both                all nations have focused their financial
investigations initiated and imposition of       subsidies on domestically owned banks
duties) surged in 2008, especially in the        rather than subsidiaries of foreign banks
second semester (Figures 3 and 4).               (perhaps a consequence of relative size
Compared to 2007, antidumping initiations        more than national protection).
grew by 15 percent and findings with
imposition of duties grew by 22 percent.         Workers in some countries, most
Developing countries accounted for the           prominently in the EU have campaigned
majority of initiations, though developed        for increased restrictions on foreign labor.
countries accounted for the greatest number      In the United Kingdom, for example, the
of duty impositions. India was the most          dispute over the use of Portuguese and
active, accounting for 29 percent of total       Italian contractors in oil refining at a time
initiations. In December alone, India            of surging unemployment led workers to
initiated    anti-dumping      investigations    strike in protest at the end of January, and
involving both hot- and cold- rolled stainless   triggered several sympathy protests across
steel products, affecting 19 countries. In       Britain. Workers complained that foreign
addition to Japan, three developing countries    companies were overlooking skilled
-- China, South Africa, and Thailand – were      British workers. In January Malaysia
the target in both investigations. The US        banned the hiring of foreign workers in
and EU were the two countries that most          factories, stores and restaurants to protect
frequently imposed duties. For example, the      its citizens from mass unemployment

TRADE NOTE #37                                                                                   PAGE 3
         amid the global economic downturn. To                                                       existing legislation and would imply no
         their credit, the Swiss voted in a referendum                                               new restriction on federal purchases. 5 It
         in early February to accept EU labor rules,                                                 would still mean that government
         including foreign labor from newly acceded                                                  purchases of iron, steel and other
         countries.                                                                                  manufactures from China, India, and
                                                                                                     Russia, among others, would be subject to
                                                                                                     the provisions.

            Anti-dumping cases are up…                                                                                     ...and growing rapidly
Figure 3                                                                                              Figure 4
                          Anti-dumping cases, 2007-2008                                                                       Growth anti-dumping cases

             Antidumping Initiations                              Antidumping Imposed                            Growth rate of AD
   120                                               120
   100                                                                                                                                                                                    2008
    80                                                80                                                                                 2006

    60                                                60                                                            -10%    2004 2005
                       countries                                                                                                                                     2005
    40                                                40                                                            -20%
                                                                                                                                                2007                               2007
    20                                                20                                                            -30%
                       Developed                                                                                                                              2004
    0                                                  0                                                            -40%
         Average Jan 07- June      Jul 08 - Dec 08         Average Jan 07 - June   Jul 08 - Dec 08                                   AD Initiations                   AD measures
                  08                                                08
  Source: Chad Brown, Global Anti-dumping Database, World Bank forthcoming.                               Source: WTO, Anti-dumping Database ( and Chad Brown, Global Anti-
                                                                                                          dumping Database, World Bank forthcoming.

            Buy America generates a storm…                                                           …but trade integration and stronger
                                                                                                         rules have thus far muted
         In late January, the US House of
         Representatives passed a stimulus bill that
         would provide a 25 percent competitive                                                      Several factors have clearly muted
         margin for US iron and steel for all                                                        protectionist pressures, and distinguish
         expenditures under the bill. Several                                                        this global downturn from the pressures of
         governments, including Canada and the EU,                                                   the 1930s.        Countries are far more
         and well known economists3 objected                                                         interdependent through supply chains,
         forcefully to the provisions. With the                                                      imported inputs, and even services. Export
         administration weighing in, the Senate                                                      interests are far more powerful than before
         version, while expanding the coverage of the                                                relative to pure import-competing
         provision to all manufactured goods, added                                                  industries. Producers for the domestic
         a stipulation that the provision “be applied                                                market are more reliant on imported
         in a manner consistent with United State                                                    inputs; and production chains link global
         obligations under international agreements”                                                 markets through a web of trade in parts
         (Sec. 1604 (d)). This apparently exempts                                                    and components. The simple average of
         the 27 EU member states and the 12 other                                                    trade-to-GDP is today 96 percent
         countries that have signed the WTO                                                          compared to 55 percent in 1970 – and
         Agreement on Government Procurement and                                                     parts and components trade, an indicator
         the countries with Free Trade Agreements.4                                                  of supply chains, has more than doubled
                                                                                                     as a proportion of total trade. Successive
         These countries collectively supply about 25                                                GATT/WTO agreements have provided
         percent of US iron and steel imports.                                                       much greater legal stability of trading
         According to USTR and private lawyers,                                                      relations. Because of this quite different
         this seemingly small change puts the new                                                    political economy today, a few proposed
         stimulus legislation into conformity with
         TRADE NOTE #37                                                                                                                                                                          PAGE 4
restrictions have been rejected or not          meantime,      contribute   to  regular
enacted.     In Brazil, for example, the        multilateral surveillance of the world
bureaucracy      attempted      to    impose    trading system. 6
widespread licensing arrangements and
import controls reminiscent of the 1970s,       The G-20, for its part, could adopt
only to provoke a response of outrage from      additional measures that would strengthen
the private sector that led to immediate        the fragile consensus against further
reversal. Similarly, the more egregious         protectionism. It could, for example:
forms of the Buy America provision appear
to have been circumvented. Moreover,               Commit to greater transparency by
about 10 of the 77 proposed and                     agreeing to provide quarterly reports
implemented changes in trade policies               on new trade restrictions, industrial
involved steps toward greater liberalization,       and agricultural subsidies to the WTO,
mostly related to free trade agreements.            together with an mandatory analysis
                                                    of the trade restriction on employment
Also, most countries have flexible exchange         (since this would create new room for
rates, and, as capital has sought safety in US      technical analysis and political
Treasuries, nominal exchange rates against          discussion in- countries themselves).
the US dollar have plummeted. This shift in
relative prices domestically has given             Agree to promote the use of standard
import-competing interests considerable             safeguard provisions in lieu of anti-
protection. The floating rate regimes have          dumping laws.
arguably preempted a wave of competitive
                                                   Agree to accelerate progress on
devaluations like the one that disrupted
markets in the 1930s. For the handful of            technical issues still separating
                                                    negotiators on the Doha round,
countries intervening in exchange rate
markets, it generally has been to prevent           including producing new working
                                                    texts on the special safeguards
further depreciations – such as Argentina
                                                    mechanism, sectoral negotiations and
and Russia. China has apparently ceased
accumulating reserves since October, and
the nominal rate has stabilized after a two        Advocate greater Aid for Trade for
year and 20 percent appreciation.                   low-income countries.
     Forceful leadership can help.                 And decide to endorse voluntary
                                                    implementation       of     the     trade
The cost of inaction on the Doha Agenda is          facilitation provisions, not as an “early
rising. To date most countries have not yet         harvest”, but in a non-binding fashion
raised tariffs to bound levels or taken full        linked to overall trade facilitation
advantage of headroom on agricultural               reforms design to lower trading costs.
subsidies, however, as the recession
                                                        Further Reading.
deepens, many countries may well do so. It
is a safe bet that the lower bindings and caps
on agricultural subsidies contained in the Baldwin, Richard and Simon Evenett (ed)
draft texts that would have kept many          What world leaders should do to halt the
markets open that will not be able to do so    spread of protectionism: 17 Essays
by the end of 2009. This underscores the       November        2008               Vox
importance of pushing forward with a rapid
conclusion of the Doha round.                  e/2993
The recent decision by the WTO Hufbauer and Schott “Buy American: Bad
membership on February 9, 2009, in the for Jobs, Worse for Reputation” Policy
Trade Policy Review Body will, in the  Brief Washington: Peterson Institution

TRADE NOTE #37                                                                                  PAGE 5
    for International Economics February
    2009.                                                   These have included economists of diverse
                                                          persuasion, such as Gary Hufbauer and Jeff
WTO Staff, “Report to the TPRB from the                   Schott, Douglas Irwin, Glen Hubbard, and
 Director-General on the Financial and                    Joseph Stiglitz, among others.       See also
 Economic Crisis and Trade-Related                        Hufbauer and Schott “Buy American: Bad for
 Developments” February 9, 2009.                          Jobs, Worse for Reputation” Policy Brief
                                                          Washington:      Peterson   Institution   for
                                                          International Economics February 2009.
  The list of proposed, enacted and/or rejected           4
trade measures is taken from news accounts,                 Most US FTAs have provisions similar to
official reports, and other sources; virtually all        Art. 9.2(1) (General Principles--National
measures are taken from two sources and where             Treatment and Non-Discrimination) of the US-
possible receive confirmation with country staff;         Chile FTA, which provides that: "With
nonetheless, numbers here are subject to a small          respect to any measure governing procurement
margin of error as government policies at times           covered by this Chapter, each Party shall
are opaque and subject to change, even reversal.          accord to the goods and services of the other
This list does not include “automatic” increases          Party, and to the suppliers of such goods and
in agricultural protection, contingent protection         services of the other Party, treatment no less
(e.g., antidumping), WTO-sanctioned measures              favorable than the most favorable treatment
to retaliate against trading partners that have not       the Party accords to its own goods, services
complied with the findings of a WTO dispute               and suppliers." The original version of the US
settlement panel and financial sector subsidies           bill would have violated this provision.
(discussed in subsequent sections).             More      5
important, this discussion does not attempt to                 Hufbauer contends that one legal
quantify the trade effect of any particular event         interpretation could asserted some new
and thereby attach some weight to each action –           restrictions, if minor, for those states that have
though obviously some actions have far greater            not acceded to NAFTA; this could be clarified
impact in closing markets than others. It is              at signing if necessary.
important to note that it is difficult to distinguish     6
the trade policy measures that are taken in  The first monitoring paper was discussed on
                                           February 9, 2009, titled “Report to the TPRB
response to the current crisis from measures that
might have been taken anyway.              from the Director-General on the Financial and
                                           Economic      Crisis    and     Trade-Related
  This is based on the methodology of Will Developments”.
Martin and David LaBorde.

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TRADE NOTE #37                                                                                                                       PAGE 6

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