Unravelling Free Trade

By the time the leaders of the G-20 nations gather at London’s ExCel Conference centre on 2 April, they will surely have seen — at least on television — thousands of protesters denouncing them for the misery being visited upon the world. They could perhaps live with the protesters’ wrath as the inevitable price of entry into the world’s newest club, but it is not just the anti-globalisation protesters that are up in arms. Given the unprecedented sense of crisis about the world economy, critical gaze of the world is on the summit. Many fear, however, that like other international jamborees, the G-20 will also be long on declarations and short on concrete measures.

The G-20’s London agenda does cover the critical issue of trade, but the indications are that between the US insistence that everybody launch massive fiscal stimuli (opposed by the Europeans) and the European interest in drafting global financial regulations (the US wants to hasten slowly), the vital question of trade protectionism will receive short shrift. And yet, in the face of the sharply falling trade, forecast to contract for the first time in two decades and rising unemployment, the danger of a lurch towards subtle trade barriers and national subsidies is mounting. The International Labour Organization (ILO) forecasts that, thanks to global recession, some 50 million people worldwide could lose their jobs.

Since the 15 November meeting in Washington, all the members of the group, with the exceptions of Japan, Mexico and Saudi Arabia, have violated their pledges made at the time to avoid the temptation of protectionism. They pledged to “refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization’s (WTO) inconsistent measures to stimulate exports.” Instead, by the World Bank’s count, some 78 trade-restricting measures have been taken all over the world. Although the impact of these mostly non-tariff barriers is difficult to measure and have not — so far — started retaliatory cycles, the fact that they have been adopted by relatively rich countries (the G-20 represents 80 per cent of the world economy) is still a bad omen. As nations begin to partially nationalise financial institutions and industry, the pressure to use taxpayer money to help only one’s own citizens is mounting. For instance, two-thirds of the US stimulus package is devoted to infrastructure, healthcare, clean energy and climate control initiatives in which political influence, rather than efficiency-driven market principles, will determine the allocation of resources. Politically powerful lobbies win, while the principle of free trade is pushed under the (domestically manufactured) bus.

The initial attempt by US lawmakers to legislate ‘Buy American’ provisions and the French government’s plan to ban outsourcing by its auto industry has fortunately been watered down in the face of sharp criticism. Still, the US law could create obstacles for the government procurement of steel from countries such as China, India and Brazil, as these have not signed the relevant WTO codes on government procurement. There are plenty of means for governments to protect their constituents without violating outright the letter of WTO rules. It is the rise of this ‘murky protectionism’ that is worrying. The knowledge that protectionism ‘protects’ only a narrow sub-section of the economy, while denying the benefits of free trade to the rest of the country, seems not to discourage politicians from embracing populism.

These initial experiences make it imperative that the G-20 not only undertake serious commitments to free trade, but establish monitoring mechanism. Unless member countries agree to set up a mechanism to monitor compliance with the pledge and publicly name and shame violators, there is no reason to expect the declarations made in April 2009 to be any more credible than those made in November 2008. There have been suggestions that the Director General of the WTO should be entrusted with publishing monthly report outlining trade violations by the G-20 and other WTO signatories. Another suggestion calls for setting up an independent web-based compliance programme, under the auspices of the World Bank, in order to log complaints against members who violate their pledge.

Whatever mechanisms of enforcement they choose to adopt, the G-20 must enact a standstill agreement, and ensure it is respected. Unless strong barriers are raised against protectionism, the London summit could prove to be a failure.