Multilateralism is the cure

The Financial Express, March 22, 2009

By Pradeep S Mehta

On March 4, The Financial Express had a news item where the US accused India of raising tariffs on soyabean and steel. Earlier, it was not only India, but many other others, including the European Union which had slammed the US for its Buy American law. Every other country is resorting to such protectionist measures to protect their own economies, and not necessarily as a tit for tat. But is that sensible?

In its November 2008 meeting in Washington, the G-20 had agreed in principle for a moratorium on a 12-month prohibition on new trade protectionist measures, but are finding it hard to honour that agreement.

The US Buy American law to cover all government procurements will certainly invite disputes at the WTO by those countries which are members of the agreement on government procurement. India is not a member of this agreement, but our grouse will be about the barrier to employ foreign IT workers in institutions which are receiving state doles. India raising tariffs on select items is not illegal, but certainly immoral, if one examines it in the multilateral context. These protectionist responses to the deepening global financial and economic crisis are natural, if not justifiable, in these troubled times. Politics triumphs economics! Many experts fear a repeat of the Great Depression of the 1930s, which was deepened by trade protectionism. Even though drawing a parallel between the current crisis and the 1930s might constitute an exaggeration as the ‘30s were an era of fixed exchange rates and failed multilateralism. The same is not the case today. But there are definite similarities — the present crisis is undoubtedly deepening with time and no early signs of recovery are visible on the horizon. Even the most optimistic forecasts see the crisis persisting till the end of 2010.

The World Bank expects global trade to contract by 2% this year because of a collapse in developed country demand, particularly in the US, Europe and Japan. This will be the first time since 1982 that world trade has declined. Importantly, this contraction is likely to be sharper than the previous downturn in 1975, when global trade shrunk 1.9%. According to a recent World Bank forecast, the slowdown can push as many as 53 million people into poverty — a serious roadblock to the targeted achievement of UN’s Millennium Development Goals (MDGs) by 2015. The recession thus has deleterious implications for all nations and sections of society, rich and poor alike. The major risk today is of WTO members resorting to trade protectionist measures which are not necessarily in violation of their WTO commitments. In other words, there could be increasing instances of increases in applied rates which are not in violation of ceilings set by multilateral agreements.

There is also scope for use of non-tariff barriers, and more frequent application of anti-dumping measures and safeguards. Statistics reveal that protectionist measures have already shown a distinct increase. The WTO Secretariat reported that in the first half of 2008, the number of initiations of new anti-dumping investigations showed a sharp 39% increase over the corresponding period of 2007. Recent economic initiatives by the US portray such protectionism vividly — indeed many other economies, in retaliation or otherwise, may be forced to come up with similar measures. The US Congress has recently voted in favour of President Obama’s $787 bn economic stimulus package containing the controversial Buy American clause. The terms require public works projects, receiving money from the federal stimulus package, to use indigenous iron, steel and manufactured goods.

After fierce pressure from Canada, the European Union and several prominent US corporations, lawmakers in Washington added a caveat to the terms clarifying that the application of the Buy American clause must not violate international trade agreements. The Act also prohibits US banks and firms receiving federal bailout money from hiring people on H-1B visas. This is obviously a move to force these concerns to hire American citizens for all vacancies. The H-1B visa has mostly benefited Indian techies, who corner close to 70% of the 65,000 H-1B visas issued annually. The response of European nations is no different. While Italian Premier Silvio Berlusconi warned appliance maker Indesit SpA not to transfer production and jobs to Poland, in Britain trade unions and politicians are demanding British jobs for British workers.

French President Nicolas Sarkozy is also not behind in this race. He has announced a six billion subsidy for domestic automakers, demanding in return a halt to the transfer of production to other countries. He has also urged French car makers to support indigenous industries involved in supplying parts and services. A stimulus package to bail out crisis-ridden industries might have a therapeutic effect on the economy and therefore is desirable. This is indeed the Keynesian prescription for reviving demand and a recession hit economy.

However, protectionist clauses attached to such bailout packages might prove counterproductive. Protectionist measures invariably tend to generate more of their kind. Such proliferation tends to halt the global welfare, augmenting movement of human and physical capital and consumer goods across nations. While each individual protectionist measure might seem fine and justifiable in isolation, their totality would surely lead to a further contraction of the global economy. The protective leash should be used sparingly, if at all.

The current global crisis needs a solid global response — the protectionist response is definitely the wrong one. Reviving the Doha round constitutes an important element of the needed response and hopefully the next G-20 meeting in London on April 2 will try and move it forward. Another proposal doing the rounds is that countries should notify the WTO about all protectionist measures with a plan to roll them back within two years. Commerce Minister, Kamal Nath, thinks that this proposal makes sense, but who will bell the cat.

The author is the Secretary General of CUTS International, a research and advocacy group. Pranav Kumar of CUTS contributed to this article.

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