Increased protectionism and the implication for developing countries

Since 1945 the world economy has shown high growth rates associated with the liberalization of goods and services and increased capital flows. However the current global financial crisis has raised concerns for many countries regarding present and potential losses that can be suffered in income and employment. The risk of protectionist policies has heightened as the financial crisis deepened and economic activity decreased with rising unemployment.

Since the start of the financial crisis the World Bank has estimated that 78 trade measures have been imposed or implemented. These trade measures include 66 trade restrictions of which 47 took effect. Several countries have raised border barriers, introduced subsidies or stimulus packages for export-orientated or import competing industries and increased the use of trade remedies. A pattern is beginning to emerge of an increase in import licensing, import tariffs and trade remedy utilization to support domestic industries.

Historical economic evidence also suggests a strong link between the increased use of import restrictive trade remedies such as anti-dumping measures and safeguards and an economic downturn associated with recessions. The Global Anti-dumping Database shows that the implementation of product level trade remedies increased by 34 percent in 2008 and in the first quarter of 2009 the utilization increased by 22.3 percent. The imposition of definitive measures in 2009 is projected to be 18.5 percent higher than in 2008.

A number of countries have implemented trade remedies, with South-South trade increasingly being affected by these measures. Developing countries have initiated 74 percent of trade remedy investigations in the period from the first quarter in 2008 to the same period in 2009 with the targeted exporters also primarily being located in other developing countries. However these inward-looking policies risk the retardation of market corrections, distorting trade and triggering retaliation by trade partners.

African countries have not played a major role in the current utilization of import restrictions even though some of these countries’ major trading partners have implemented different forms of import restrictions, investment and finance support and job protection measures. The increased implementation of protectionist policies by or against developing and least developing countries can jeopardise growth prospects and developmental goals, especially for African countries.

* Protectionism can lead to higher unemployment and prices with an increase in debt. Protectionist policies arguably lead to an increase in the cost of consumer goods and production inputs. Due to the protection of domestic industries, foreign competition is reduced which can have the undesired effect of inefficient domestic firms.

* Export subsidies are concentrated on few products, including dairy, beef and fruits and vegetables. These products can often be produced and exported more efficiently by developing countries. However an increase in export subsidies penalizes developing country producers which do not have access to subsidies and provide an incentive to over produce. This can lead to a surplus in the market leading to lower world prices and limiting the ability of developing countries to compete in local and export markets. African economies are dependant on agricultural exports thus an increase in subsidies can lead to a decrease in revenue and a deterioration of the trade balance for many African nations.

* If countries take advantage of the gap between applied and bound rates (water in the tariffs) the potential negative impact on world trade and welfare has been estimated at a decline of 7.7 percent in world trade and US $ 353 billion in world real income. The increase of tariffs on agricultural products will have a dramatic effect on exports and welfare for developing and least developed countries.

The World Trade Organisation (WTO) and the World Bank have indicated that the contribution of protectionist policies to the decline in trade has been limited to date, however looking forward there is a risk of a retreat from trade liberalization and open border policies which has been followed in the past decade. Although the level of trade affected by protectionist policies has thus far been small for most economies, these policies can have important welfare-distorting effects beyond the loss of imports and losses to domestic consumers.

As the financial crisis puts increase pressure on African economies the question remains whether governments will resist political pressure to utilize the implementation of protectionist measures to protect domestic industry and employment? South Africa has already indicated that they are considering raising import tariffs on garments to maximum levels agreed to by South Africa in the WTO. Is this an indication of policy measures to come by African countries as economic activity decrease due to the global recession?

Willemien Denner, a tralac Researcher, On increased protectionism and the implication for developing countries.

http://www.tralac.org/cgi-bin/giga.cgi?cmd=cause_dir_news_item&cause_id=1694&news_id=69150&cat_id=1059

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