Trade is Falling, but Credit is not Due to Protectionism (yet)

Alarm bells are ringing. Trade is falling, and so we have rounded up the usual suspect -- import protection. Yet we really have not seen a sustained wave of protection so far, only a wave of anxiety. What we have seen is a real collapse in trade volumes, caused by a mix of falling demand, buyer uncertainty, and an apparent lack of export credits. It is striking that in recent revisions to U.S. GDP statistics for the end of 2008, it now appears that U.S. real exports fell 23.6 percent in the last quarter of 2008, while real imports fell 16.0 percent.

The drop in world trade is very real. The jury is out on the cause. How deep is the collapse? According to Wharton, the Baltic Dsy Index for shipping prices is down 90% from its May 2008 peak. In addition, there is evidence that perhaps half the global shipping fleet is idle. This is the mirror to falling domestic economic activity across the globe. Import protection certainly will not help. However, we need to devote energy to a better understanding of what has driven the collapse so far if we want to address the issue. Credit may be a big part of the picture. Apparently, carmakers in Japan are unable to get loans for their American customers, while exporters in a range of industries complain that lack of credit makes international shipments almost impossible.

References
Countries Stepping in to Finance Export Trade, New York Times, 3 March 2009.
Trade Wars: Will Protectionism Win out over Recovery?, Wharton Knowledge, 18 February 2009.

It is time for me to disagree with myself -- we need both Doha and a trade standstill agreement

In other fora, here and on VoxEU, I have argued that we need to stop focusing on the Doha Round, and move on to real dangers -- like rising protectionism outside the bounds we have placed on MFN tariffs. Times have changed. It is still true that the substance of the Doha Round will not impact the current crisis. A successful agreement would take years to implement, and it does not address the discretionary protection now threatening trade. However, in the present climate, it could serve as a potent symbol of commitment. So, for its value as a symbol, we should conclude it now, even if in a truncated form. To silence the darker voices urging our leaders to shift shared burdens onto others -- the EU has now reintroduced dairy export subsidies for example -- concluding Doha would be a sign that we choose to ignore those dark voices. Even this is not enough. There should be more. The OECD should collectively declare a temporary standstill (24 months?) on discretionary protection. This would mean no antidumping, countervailing, or safeguard actions involving partners (including non-OECD partners) that also adhere to the standstill agreement, as well as a suspension of reintroduced export subsidies, until calmer heads and markets again prevail.


In the absence of a Trade Standstill Agreement, or something of the sort, things will get nasty. Indeed, they already are, judging from headlines just this week. The EU has started to introduce export subsidies, which means they are forcing other countries (including poor producers) to carry their share of the burden linked to depressed agricultural prices. At the same time, the United States Congress is gunning for a weakened China for maintaining an undervalued currency, even though China's exports are falling and the Chinese are needed to buy U.S. bonds and so fund Obama's new initiatives. Antidumping actions will undoubtably surge as the global economy grows worse, as evidenced by India's recent antidumping assault on China. The U.S. Congress is also trying to redirect subsidies linked to antidumping duties back to firms, even though they have been found to violate U.S. treaties. Exporters know this is a losing game. They need to press for a collective cool down period.

Ignore the dark voices. We are in this together. Just say no....

Further reading:

"Producers brace for tariff pain," AUSTRALIAN dairy farmers are under attack after the European Commission launched a barrage of export subsidies on to the world market...., Weekly Times Now, 28 January 2008.

"China slams EU anti-dumping move, threatens WTO action," China Wednesday blasted an EU decision to slap hefty anti-dumping duties on Chinese-made screws and bolts and said it may take the issue to the World Trade Organisation..., AFP 29 January 2009.

"ECONOMIC STIMULUS INCLUDES ANTI-DUMPING RELIEF FOR DOMESTIC LUMBER, STEEL & CEMENT FIRMS," Domestic lumber, steel and cement firms now required to pay back anti-dumping funds they received earlier this decade could seek their bills covered under a provision senators have included in the Finance Committee’s $455 billion economic stimulus measure...,Rotor News 27 January 2009.

"Beware trade wars," The threat to world trade comes from the Omnibus Trade and Competitiveness Act of 1988. Should the Treasury officially determine China to be a currency manipulator, itcould unleash a range of remedies, including antidumping measures, countervailing duties and safeguards..., Willem Buiter FT blog, Published: January 27 2009.

"India begins anti-subsidy probe against China," After setting off an avalanche of anti-dumping probes into a diverse range of manufactured products against China by responding to the domestic industry’s concerns in recent months, the Commerce Ministry has for the first time begun an anti-subsidy probe into imported sodium nitrite from China..., Business Line 29 January 2009.

The GATT (aka the WTO) works

There has been a dispute in the academic literature about the impact of the GATT on trade liberalization. The first shot was a set of papers by Andrew Rose. [1]. His papers have since been savaged by follow-up literature. [2]

The ongoing financial crisis has rendered this literature, quite literally, academic. What I mean is that, basically, the real test is what has just (not) happened. As Doug Irwin noted in his review of the GATT and its transition to the WTO, the first part of the 20th Century -- World War I and the early years of the Great Depression -- were characterized by savagely competitive tariff wars. [3] The framers of the Bretton Woods system had this firmly in mind when they set up the post-War system. [4] We may wonder at times exactly what the IMF and World Bank are doing at the moment. We no longer have to wonder about the GATT (aka the WTO). It is a systemic safeguard, and it seems to be working. Notice the deafening sounds of silence along Smoot-Hawley lines. Indeed, we have calls for further trade liberalization in the WTO. Recent events may also shed a new light on regionalism. In the academic literature, regional agreements have been seen as potential stumbling blocks to the multilateral system. Yet, as safeguards against protectionism in a big global crisis, the EU and NAFTA appear to be complementary safeguards. We have been focused, in much of the literature on the GATT and on regional trade negotiations, on the process of marginal concessions and terms-of-trade manipulation. Aside from all this academic analysis, in the real world the multilateral trading system is doing what it was actually meant to. There will be rising protectionist responses as we sink further into recession. However, as long as the system holds, this will not be broad based.

[1] A.K. Rose (2003), "Do WTO members have more liberal trade policy?" Journal of International Economics Volume 63, Issue 2, July 2004, Pages 209-235.

[2] A. Subramaniana and S-J Wei, "The WTO promotes trade, strongly but unevenly," Journal of International Economics, Volume 72, Issue 1, May 2007, Pages 151-175.

[3] D. Irwin (1995), "The GATT in Historical Perspective," The American Economic Review, Vol. 85, No. 2, pp. 323-328.

[4] J. Toye and R. Toye (2005), "From Multilateralism to Modernisation," Forum for Development Studies, No. 1, pp. 127-150.

[5] K. Bagwell and R. Staiger (1999), "An Economic Theory of the GATT," The American Economic Review, Vol. 89, No. 1, pp. 215-248.

It is time to declare victory and go home

We have been here before

We are still negotiating the Uruguay Round. This may come as a surprise to casual observers and negotiators alike. After all, documents were signed in Marrakech in 1994 concluding the Round.


As the Uruguay Round drew to a close, US and EU negotiators were unable to make substantive progress on agriculture, middle-income countries were demanding credit for unilateral liberalisation undertaken outside the GATT, and LDCs were demanding one-sided concession from the OECD. The unelected leaders of the nascent anti-globalisation movement, flush from their first kill with the death of the Multilateral Agreement on Investment, demanded that the representatives of elected governments either give them some control over the process (a “seat at the table”) or end the process entirely. Lester Thurow declared the GATT dead, and....


You can read the rest of this posting on VoxEU.

Time for crazy ideas -- part 2 (spaghetti or spiderwebs?)

In a previous post, I suggested that we give up on agriculture in order to complete the Doha Round. I want to focus here on the bread-and-butter business of the World Trade Organization -- prospects for negotiations to reduce merchandise tariffs. For the impatient, the punch line is a call for either zero manufacturing tariffs by the OECD on an MFN basis, or else an OECD-based plurilateral agreement in the WTO for zero tariffs in manufactured goods. For the more patient, read on.

In the run-up to the NAFTA in the 1980s, the word on the street was that multilateralism was in trouble. More bluntly, the catchphrase was "GATT is dead." Unable to win sufficient points with the EC on agriculture, and the developing world on services, the U.S. focused instead on a bilateral strategy. An important added ingredient in the policy mix was the belief that a major Asian trading partner (Japan) was unfair and kept its currency low to promote exports. So the U.S. turned to its neighbors -- Canada and Mexico. Intellectually, we had Jagdish Bhagwati condemning NAFTA and Paul Krugman selling the idea of strategic trade policy. In fact, this does not sound so different from the present day. Yes, the EC was smaller than the EU. And yes the U.S. Congress is railing against China instead of Japan. Yet multilateral trade negotiations in Geneva are again stuck, and impatient negotiators are working on relatively easy bilateral agreements to take their minds off the impasse in Geneva. The U.S. has signed a deal with Korea, while the EU is busy negotiating with Korea as well. Asian parties are also talking (again) of regional solutions --though so far this has been dominated by bilateral agreements. The web of bilateral and regional agreements grows increasingly complex.

There are important differences between the previous dance of regional agreements on the grave of multilateralism, and the current one. The spider's web of regional agreements now in place has done serious damage to the basic non-discrimination principle of the trading system. (This is commonly referred to as a spaghetti bowl rather than a web, usually as in "Prof. Jagdish Bhagwati has called this the Spagheti bowl..." Sorry, but I do not think a bowl of pasta sounds sufficiently sinister. So, since this is my space, I will use the spiderweb metaphor...) When the GATT was set up, a founding principle was the idea that small countries should be treated as equal to big ones, so that there would be no side deals that might lead to a repeat of colonial trading empires or to unbalanced (and unfair) negotiations between unequal partners. Any pretension that this is still the case is gone. The EU now actively uses preferential trading arrangements (can we call this a neo-colonial trading system yet?) to push its agenda in developing Africa, while the U.S. now routinely incorporates trade deals in its geopolitical maneuvers. In this way the US tries to tie Jordan and Egypt and Central America with commercial bindings. With the exception of a few of these agreements, none, individually, really matter much for the U.S. and EU. Trade agreements with Botswana and Jordan and Costa Rica and Israel are not going give a big boost to the economies of Europe and North America. Rather, the logic is geopolitical. In the Cold War era, the OECD Members all saw a global trading system as an important strategic asset in keeping the west united against the communist threat. Clearly, this no longer holds. The result is the use of free trade agreements to cement bilateral political deals. This has led, predictably, to FTA burnout. The U.S. Congress is tired of the recent string of regional trade agreements. They cost political capital to support, and the economic benefits are not all that big. Similarly, while the European Commission pushes ahead with regional agreements, the European electorate also appears to suffer from globalization burnout. And we clearly do not have a Bill Clinton to drive the GATT/WTO negotiating round home this time around.

In a sense, the irony of trade as a geopolitical tool in the Cold War was that trade was removed in an important way from the political arena. I do not mean that it was not a political issue. Rather, the push for a broad multilateral system coincided with post-World War II efforts to dismantle bilateral trading systems that were an offspring of old colonial empires. It also meant that the U.S. perceived its foreign policy interest to include promoting liberal trade regimes. So trade was less bilateral (and so less a tool of bilateral and partisan dealings.) The non-discrimination clause of the GATT was important here. It helped to prevent a slide back into the economic underpinnings of centuries of trade-based military conflict involving European commercial empires. (Just think of the Dutch and British wars in the Indies, the Opium War, the British and French Wars, everyone looting the Spanish empire, Japan and its East Asian Co-prosperity Sphere vs the West, England in the Indian subcontinent, &tc &tc). Given the apparent long-run historical implications of bilateralism, we should be worried by its vigorous revival.

The Doha Round is supposed to promote the interests of developing countries. Negotiators have tried to follow past GATT negotiating rounds, with the adoption of a tariff cutting formula. Yet, it is proving almost impossible to fit a formula to the varied tariffs of developed and developing countries. In addition, our spider's web of regional agreements (ok, you can call it a spaghetti bowl) has created conflicting incentives for developing countries. This system helps some countries by discriminating against others. In many cases it helps the poor by hurting the not-quite-as-poor. It also confuses matters with complex requirements for rules of origin. These are necessary because, given an FTA, there is otherwise a risk of transshipment. There is evidence that rules of origin prevent takeup up notional trade preferences, or at least impose costs that eat significantly into their benefits.

There may be a simpler way to move forward, without the need to balance formula coefficients across North and South. It is time for the high-income countries to simply declare zero tariffs for all manufactured goods. In one step, this would present a maximum concession to developing countries, eliminate entirely the need for rules of origin, and greatly simplify the administrative costs of doing trade. It would also undo recent damage linked to FTAs, preferential North-South deals, and the return of bilateralism. Most multinational firms in the OECD (computer manufacturers, motor vehicle manufacturers, &tc) would embrace such a simplifiction of the rules they face. Indeed this is exactly what happened with the Information Technology Agreement. It started with 29 members, and now has 70, covering 97% of trade in information technololgy products. A similar approach could be followed collectively across the OECD either simply as binding commitments, or perhaps as a plurilateral agreement. (A plurilateral agreement would be one that applied to all signatories.) The advantage of a plurilateral is that simple conditions could be set for developing countries (such as flat tariffs in a band of 8 to 10 percent, for example, with a schedule for reduction) to immediately sign on, and to realize benefits today from a concrete commitment to rationalize their own policies tomorrow. It would also take the wind out of the sails of conspiracy theorists that argue that poor countries are poor because of OECD protection. (As an aside, most import protection against developing countries is imposed by other developing countries.) Such an approach could set in motion a tremendous, relatively automatic rationalization of trade rules. Unlike bilateral agreements with small countries and city-states, such an agreement would be worth spending political capital in Washington or Brussels to promote.

But what about all the fans of FTAs? How would they feel about such a WTO-based approach. In a sense, this is one logical path mapped out by the intra-OECD FTAs that now include, in various combinations, the U.S., Canada, Mexico, Korea, Australia, and New Zealand. Indeed, one could pitch this when necessary as a super-FTA, with pre-defined membership criteria. They could have their FTAs and the WTO too.

Further reading:

• "Comments in the Financial Times on the U.S.-Korea FTA.," M. Wolf, J. Bhagwati, F. Bergsten, A. Sapir, D. Vines, and more leading characters in this drama. There is even a bit of he-said she-said between Bhagwati and Bergsten. This is good stuff!


• "America's Bilateral Battle Against Free Trade," J. Bhagwati on the real risks posed by the emphasis on regionalism instead of multilateralism, Financial Times, April 2007.


• "Who's Afraid of an All-Out Trade War? We'll Do Okay if Push Comes to 'Shove Off'," P. Krugman on the joys of trade wars circa 1990 (or as Peter Sellers would say, "how I learned to love trade wars...")


• "The Regionalism Debate: An Overview," A. Panagariya, published in World Economy, June 1999, 477-511.


• "Liberalizing Trade in the Developing Countries," A. Panagariya, takes apart the neo-protectionist arguments in the antiglobalization/NGO school of thought, published in Foreign Policy, September/October 2005.


• "Preference Erosion and Multilateral Trade Liberalization," J. Francois, B. Hoekman and M. Manchin, final version published in The World Bank Economic Review 2006 20(2):197-216. Takes a critical look at how much scope there really is for preference erosion, and quantifies rules of origin costs in the context of EU preference schemes.


• "Clothes Without an Emperor: Analysis of the Preferential Tariffs in ASEAN," M. Manchin and A. Pelkmans, 2007. Offers evidence that Asian tariff preferences have largely been a farce, eroded almost completely by rules or origin and related compliance costs.