Leaders from the U.S., France, Italy, Germany, Japan, Russia,
Canada, and the United Kingdom are scheduled to meet July 8-10 in
Italy for the latest G-8 summit meeting. Looming ever larger on the
economic policy agenda is the state of global trade.
With so many countries' economic well-being linked with others'
through Trade and investment, a worldwide liberal Trade and
investment regime is crucial to helping the global economy recover
and grow, especially with forecasts of global Trade contracting
significantly this year. Yet promises made by G-20 leaders in
November 2008--and again during the London Summit in April 2009--to
protect the international trading system from anti-market policies
in response to the global economic downturn have gone unfulfilled.
Caving to domestic pressure, G-20 and other countries have
variously introduced new tariffs, quotas, government subsidies to
businesses and farmers, domestic preferences in government
procurement, and new regulatory barriers to trade.
While policymakers often justify such protectionism as a means
to bolster their domestic economies, these measures are likely to
have just the opposite effect. They not only distort and shrink
international markets for goods and services, but have a chilling
effect on private investment at home--the very thing needed to help
economies recover and grow in the longer term. Trade barriers also
add to the economic burden faced by families trying to stretch
incomes in uncertain times and may drive import-using firms out of
business altogether. Moreover, while protectionism may save a few
jobs in a globally uncompetitive industry, it does so at the
expense of many more jobs across the economy as a whole.
For all of the costs associated with erecting barriers against
Trade with the rest of the world, protectionism remains the easy
and typical policy reaction to an economic downturn. Policymakers
seeking to provide relief to struggling firms and families
frequently turn to subsidies and other market barriers to soften
the blow of a weak economy--even at the risk of undermining
longer-term economic recovery and tempting international
retaliation for new discriminatory and protectionist measures.
Thus, it is no surprise that the promises made at the previous
two meetings of the G-20 have failed to translate into
comprehensive and consistent policy actions that enshrine open
markets as the foundation of countries' long-term economic recovery
strategies. That failure has resulted in a slow creep of
protectionism around the world that no country can afford to
sustain. As nations whittle away at the progress made over the past
60 years toward dismantling obstacles to the international flow of
goods and services, they undermine the very engine of growth that
has eased poverty and brought prosperity to so many.
National leaders must do more than offer what have proven to be
empty promises to resist protectionism. Instead, the upcoming G-8
meeting in Italy should be used as a serious forum to invite all
countries to make honest commitments to reverse any protectionist
measures adopted since 2008 and to establish a tangible, timely
agenda for getting multilateral Trade talks back on track in the
World Trade Organization (WTO).
The High Price of Protectionism
Recent WTO and World Bank studies show the impact the global
recession has had on Trade and shed light on the protectionist
measures that countries have adopted in response to tougher
economic times. In a speech at the annual ministerial meeting at
the Organisation for Economic Co-operation and Development (OECD)
in June, WTO Director-General Pascal Lamy stated that the WTO is
forecasting that global Trade will contract this year by 10
percent--a full 1 percent worse than predicted in March.
Additionally, the volume of Trade from developed countries is
expected to fall by an average of 14 percent, and from developing
countries by an average 7 of percent. These numbers are
significantly larger than the WTO estimated in March, with 10
percent and 2 percent to 3 percent losses, respectively. The
worsening climate for Trade is being driven largely by falling
global demand and by growing uncertainty over the impact of an
increase in the number of protectionist measures implemented by
countries around the world either to help certain industries or in
retaliation for Trade measures elsewhere.
With many countries taking an incremental approach to adding
barriers to Trade, many measures may seem trivial when considered
in isolation and relative to total Trade flows. However, when these
measures are aggregated, the concern that the international trading
system will eventually drown under a steadily rising tide of
protectionism becomes very real.
Global Trade is put at risk today by the growing number of
distortions that new protectionist policies are imposing on
markets. Moreover, global Trade is put at risk in the future as the
specter of a global Trade war looms larger with each new
tit-for-tat Trade restriction that countries impose on each other
and as the worsening and increasingly confrontational Trade
environment undermines the chance for a timely conclusion to the
Doha Round of Trade negotiations.
Yet More Anti-Trade Measures
Since the onset of the financial and economic crisis, national
governments have increasingly been using anti-dumping
investigations and imposing punitive measures to stem imports of
steel products, chemicals, textiles, and other sensitive
products. Article 6 of the General Agreement on
Tariffs and Trade (GATT), in conjunction with the WTO Anti-Dumping
Agreement, allows countries to retaliate against dumping by
assessing additional duties on dumped products from specific
countries if the dumping is causing material damage to the
importing country's respective industry. But excessive use of
investigations serves as a Trade barrier--increasing the
uncertainty faced by importers and exporters alike, as well as
raising tensions between countries relevant to the
Direct and indirect subsidies, too, have been on the increase.
The U.S. auto bailout set off a rash of government handouts, cheap
loans, and other interventions in the industry in France, Japan,
Germany, the United Kingdom, China, Argentina, Brazil, Sweden, and
Italy among other countries.
Direct and indirect subsidies for the financial sector,
insurance firms, and other sensitive industries can be very costly
for both domestic and global markets. Firms receiving government
handouts obtain an artificial competitive advantage over firms that
do not, which could result in more efficient and productive
companies being driven out of business. If those subsidies come
with requirements that subsidized firms employ only domestic
workers, lend only to domestic businesses, or buy only from
domestic suppliers, the economic distortions they introduce are
even more pernicious, driving the inefficient allocation of
resources across countries and causing economic harm to businesses
and families around the world.
In late May 2009, the U.S. announced export subsidies to bolster
international sales of U.S. dairy products. Blaming the role of
similar subsidies introduced by the European Union (EU) in January
2009 for declining U.S. competitiveness in global dairy markets,
America has opted to respond in kind instead of trying to persuade
the Europeans to eliminate the trade-distorting measures--the very
kinds of measures that both the EU and U.S. promised to avoid in
their G-20 pledges.
Export subsidies are particularly trade-distorting and, in the
case of agriculture products, an especially sensitive topic within
the WTO. subsidies and many other domestic support programs
artificially prop up domestic prices for food and food products.
Thus, they raise the cost of living for families buying food that
is produced expensively in home markets. In addition, the same
Trade measures depress world prices for agricultural products,
negatively affecting farmers in developing countries and stifling
their attempts to rise from poverty and improve their living
In the aftermath of the U.S. move, at a recent meeting of the
Cairns Group of agricultural exporting nations in June, the
attending countries' ministers rightfully decried the subsidies,
reiterating the critical need for the world's economic leaders to
prevent the widespread implementation of Trade barriers by
resisting additional protectionist pressures at home.
Progress in WTO negotiations has already been thwarted by
developing countries' displeasure with lackluster offers from the
U.S. and EU to cut existing agriculture support. New programs will
certainly do little to defuse the problem.
The expanded use of domestic preferences in government
procurement as dictated in Buy American provisions harms the
domestic economy as well as the international market. Limiting
competition to domestic firms increases the likelihood that
government will not get the best value for the taxpayers'
Moreover, while the U.S. promised to adhere to its international
commitments of maintaining some openness to foreign sources in
government procurement, this promise means less than it might
appear. Only national signatories to the Agreement on Government
Procurement in the WTO or U.S. free trade agreements have some
protection under the new provisions. Many more countries, including
such key U.S. Trade partners as India, Brazil, and China, could be
shut out from U.S. government contracts and retaliate in kind,
closing the door on U.S. firms anxious to find customers anywhere
they can. Where America walks, others may choose to follow.
Not forgotten are new or higher tariffs, quotas, import and
export taxes, and outright bans on trade. Among others, Russia has
raised tariffs on automobiles; Brazil, on certain steel products;
Vietnam, on semi-finished iron and non-alloy steel; India, on
soybean oils; Zambia, on finished petroleum products; and Ecuador,
on more than 600 products. China has banned the import of Belgian
chocolate, Italian brandy, and other products, and India has closed
its market to toys from China.
Less transparent, but with as much potential to undermine
international Trade, are new, excessive Trade licensing rules, tax
levies and rebates, sanitary and product safety restrictions,
environmental controls, and other regulatory non-tariff barriers to
Trade that many countries are adopting. Examples include
Indonesia's restriction of port access for certain garments,
footwear, toys, electronics, and food and Argentina's imposition of
non-automatic licensing requirements on a host of goods.
In March 2009, the World Bank reported that 17 G-20 members and
other countries have implemented approximately 78 new protectionist
measures since the onset of the financial crisis in fall 2008.
Forty-seven of these were implemented after the G-20 pledge
against protectionism in November 2008--a sad example of
governments saying one thing while doing another. Since March, even
more barriers to Trade have been erected or are being considered by
countries around the world. Not all of these measures violate
international Trade commitments made by countries in the WTO or
other regional and bilateral Trade agreements; but all restrict
Trade, distort economic incentives, restrain worldwide growth, and
ultimately undermine the rules-based spirit of the WTO and the
international Trade system it monitors.
Based on their track record of anti-protectionist
pronouncements, the leaders of the G-20 have the message about the
benefits of Trade right--at least at the rhetorical level--but that
rhetoric must be backed with consistent and substantive policy
action. The mere promise to protect Trade is clearly not
Protecting Free Trade: Concluding the
The evidence linking economic growth to Trade freedom is strong.
According to data from the 2009 Index of Economic Freedom,
countries with freer Trade policies experience significantly higher
per capita economic growth than countries that maintain Trade
barriers. The top 10 percent of countries in terms of Trade freedom
had five-year compound per capita gross domestic product (GDP)
growth rates averaging 5.6 percent. By contrast, the 10 percent of
countries with the lowest levels of Trade freedom had five-year per
capita GDP growth averaging just half as much, or 2.8 percent.
Changes in Trade freedom are also important to GDP growth. The
20 countries whose Trade freedom has improved the most over the
15-year history of the Index enjoyed per capita GDP growth
averaging 3.35 percent between 1995 and 2006. The 20 countries
whose Trade freedom scores fell or improved the least saw their per
capita GDP grow at an average rate of only 1.37 percent.
When a country lowers its barriers to Trade, it opens its
economy to competition and a wider variety of goods and services
than was previously available. Competition spurs the movement of
labor and capital from industries that cannot compete to those that
can, enabling a nation both to produce more efficiently and to
attract new investment-- critical elements of any long-term growth
Because of the vital link between economic prosperity and Trade
freedom, it is vital that countries strive to advance liberal Trade
rules and dismantle new and existing trade-distorting non-tariff
barriers. agriculture protections that have largely survived over
six decades of Trade liberalization, market restrictions in
services, manufacturing tariffs and subsidies, and the multitude of
Trade barriers to which developed and developing countries so
tenaciously cling need to be eliminated to reap the economic
benefits from international trade.
The Doha Development Agenda includes some of the member
countries' most politically sensitive and difficult Trade issues.
The U.S. and the EU need to make meaningful offers to cut--not
add--agricultural protection, and countries such as India and
Brazil need to offer reductions in manufacturing and services
barriers. Developing countries overall need to offer to bring bound
rates closer to rates that are applied at the border. All countries
need to commit to some level of tangible liberalization.
Regrettably, member countries have yet to step forward with
offers sufficient to bring the round to a successful conclusion.
Indeed, many are compounding the problem by adding Trade barriers
in response to the economic slump.
The collapse of global Trade negotiations in July 2008 was more
a reflection of the participants' inability to agree on a handful
of "deadlocked" issues than a sign of broad disagreement about what
a comprehensive multilateral Trade agreement should look like. Of
particular concern was the demand that developing countries be
granted an excessive special safeguard mechanism for use as a means
to protect domestic producers from import surges. Had the demand
been fulfilled, developing countries would have been able to apply
higher, temporary tariffs in excess of current bound rates, not
only undermining the fundamental objective of negotiating for freer
Trade, but also reversing progress made with the conclusion of the
Uruguay Round in 1994 and in the accession agreements defining the
trade-liberalizing commitments of newer members.
Today, economic conditions, changing policies, and the simple
politics of Trade are keeping the talks on hold. G-8 nations and
other countries around the world offer rhetoric about the
importance of reviving the negotiations; however, the longer the
Doha Round remains in limbo and the more confrontational and
complex international Trade becomes, the less likely it is that the
talks will be restarted. As they try to cope with the economic
crisis, countries are turning increasingly inward, leaving liberal
Trade policy out of national recovery strategies at the very time
that such a policy is needed to keep global commerce flowing.
The loss or even reversal of progress already made in lowering
Trade barriers would have a tangible impact on all nations. Since
the WTO was established in 1995 and up until the current economic
downturn, real growth in Trade of goods and services has averaged
more than 7.5 percent among lower-income and lower-middle-income
countries and 7.2 percent for high-income countries--faster growth
on average than these countries' average rates of GDP growth.
With countries trading more, it is no surprise that they are more
integrated with the global economy. Measured by the ratio of Trade
to GDP, lower- and middle-income countries' Trade integration has
risen from an average of 71 percent in the early 1990s to 94
percent today. Trade integration has increased for high-income
countries as well, climbing from an average 113 percent to 132
With international Trade playing an increasingly large role in
national economic performance, and with individual countries
becoming ever more connected to global markets, the cost of
backtracking on the commitments that WTO members have already made
harms the implementing country and its Trade partners and would
leave the world waiting longer for a recovery from today's economic
slump. Thus, the risk of delaying progress in the WTO is
First, countries will look increasingly to bilateral and
regional free Trade arrangements to reap the benefits of lower
Trade barriers more quickly.
Second, the domestic pressure to implement protectionist
measures in response to the current economic downturn will be
unchecked and could lead to an unraveling of the international
Free trade agreements (FTAs) can help to reduce Trade
restrictions globally by demonstrating solutions to difficult Trade
problems. However, they can also discriminate against countries
that are not party to the agreements, and their differing rules can
add to the cost of trade. FTAs are not a perfect substitute for
multilateral Trade liberalization, and WTO members need to ensure
that concluding the Doha Round takes priority over FTA
With Trade negotiations in the WTO stalled, the continued lack
of a new, comprehensive multilateral Trade pact reduces national
governments' discipline in reining in protectionism. Such
discipline can evaporate altogether during an economic slump and
could lead to a costly explosion of Trade measures, further
complicating negotiations on a multilateral Trade deal and feeding
a vicious cycle that undermines the WTO, the rules-based system of
international Trade, and the integrity of global markets.
Moreover, without the new market access a multilateral deal
would bring, it will be more difficult for firms that are
struggling domestically to export instead. When all sales
opportunities dry up, companies go out of business, jobs are lost,
and the chance for economic recovery is postponed.
Ultimately, the costs of delaying a multilateral deal pale in
comparison to the cost of a complete failure of the Trade round.
Liberalization of multilateral Trade and investment is crucial not
only to help the global economy recover, but also to reduce poverty
and promote growth over time. The G-8 and the world cannot afford
to let the Doha Round be the latest victim of the global
American Leadership at the G-8
President Barack Obama, U.S. Trade Representative Ron Kirk, and
other U.S. government officials have been quick to give public
assurance that America supports a meaningful conclusion to the Doha
Round and subscribes to the belief that open international markets
are critical for the global economy. Much of Congress, however, has
remained openly antagonistic to Trade, tucking protectionist
provisions into the stimulus bill and other legislation and, most
recently, introducing Trade legislation that will likely deal a
real blow both to America's prominent role in global markets and to
the integrity of those markets themselves.
While the Obama Administration has sought to reassure America's
Trade partners that the U.S. will not abandon its legacy of
supporting open and free commerce, it has done little to
demonstrate that commitment in substantive terms, stop anti-trade
legislation, or combat growing protectionism in the U.S. Indeed,
the little guidance offered to date on what shape Trade policy will
take under the Obama Administration leaves few questions
Most troubling is the indication that America's international
Trade commitments will not ultimately discipline the
Administration's policy approach to the environment, energy, or the
aggressive tactics the U.S. will employ to combat what it perceives
as the unfair Trade practices of other nations. Thus, it is no
surprise that the U.S. is already on the path to enacting
protectionist government procurement provisions, subsidies,
regulatory barriers to Trade, and other interventionist measures to
restrict markets while lambasting other nations for doing the
Because America leads on Trade policy by example, those policies
must be clear, certain, and consistent with the open-market
principles the U.S. has long fought for and supported. The
Administration must do more than offer free Trade rhetoric if
confidence in the U.S. and world economies is to be restored.
The Administration should arrive at the G-8 summit ready to lead
the international debate on rolling back creeping protectionism and
establishing a hard commitment to conclude the Doha Round of Trade
negotiations. Ultimately, G-8 leaders should:
- Commit to eliminating Trade barriers established in the
aftermath of the financial crisis within the year. subsidies,
tariffs, quotas, green protectionism, labor restrictions, domestic
preferences in government procurement, and other discriminatory
measures distort Trade, undercut the effectiveness of the
international rules-based approach to Trade, and undermine the
potential for concluding a new round of multilateral Trade
- Encourage countries outside G-8, G-20, and other
multilateral fora to match the stand-down on protectionism and
commit to a global moratorium on new Trade barriers and excessive
use of Trade remedies. Trade barriers do nothing to bolster
employment, productivity, or economic growth. They harm both the
country implementing them and the rest of the world. Economic
recovery depends on restoring confidence: Transparent, consistent,
and beneficial liberal market policies are the correct approach to
kick-starting the world's economic recovery.
- Establish a hard timeline and blueprint for resuming global
Trade negotiations within the WTO and bring the round to a rapid
conclusion. G-8 and other WTO member countries need to be
flexible in finding a way forward for multilateral Trade talks.
Negotiations collapsed in 2008, despite the fact that negotiations
on Trade facilitation and other issues had reached broad consensus.
While the political need for a comprehensive deal remains, members
should consider moving forward with those pieces of the deal that
work so that negotiators can focus on the remaining topics.
Critical to the recovery of both the U.S. and international
economies is the need to bolster consumer and business confidence.
Also critical to economic recovery is the need to maintain free and
open markets in spite of domestic pressures to erect barriers to
Trade that many countries are experiencing. Tariffs, quotas, many
government subsidies and cheap loans to businesses, outright
nationalization of industry, and other policy mechanisms serve not
only to distort and reduce international markets for goods and
services, but also to depress private investment--the very thing
needed to help economies get back on track and grow in the longer
With the international engine of economic growth increasingly
threatened, time is running out for the world's leaders to take
sound steps to strengthen the global trading system. G-8 leaders
have yet another opportunity in July to revitalize the Doha
Development Round of Trade talks by acting aggressively to remove
the barriers to Trade that they promised to avoid last November.
They should include a hard timetable for the elimination of
protectionist measures introduced since the onset of the financial
and economic crisis last fall. Adopting these and other
trade-promoting measures would boost public confidence in markets
and help to speed the economic recovery that American and world
leaders are seeking--and that their citizens so desperately
Markheim is Jay Van Andel Senior Trade Policy Analyst in the
Center for International Trade and Economics at The Heritage