How far have safeguards built into trade agreements helped in keeping trade open in these difficult times?

The World Trade Organization released its World Trade Report 2009 (WTR) recently in Singapore. The WTR examines a dilemma that governments face at the time of economic crisis. At one level most governments come under pressure — usually but not exclusively from the domestic political constituency — to adopt measures that may restrict trade.

If such pressures are not addressed adequately, they can lead to ‘a dangerous escalation’, with other countries embarking on tit-for-tat policies. Contingency measures that have already been agreed upon under the multilateral trade rules can act as a ‘safety valve.’ These include safeguards, anti-dumping measures and increase in tariffs up to limits prescribed by the WTO.

Protectionism

It is perhaps inevitable that protectionism will rear its head in these times of a global financial and economic crisis. There might be a slight improvement in the global economic outlook but the developed economies are forecast to contract during 2009. Both the IMF and the World Bank expect only China, India and a few other developing countries to post positive growth rates. The global institutions have said that recovery, when it takes place, will be weak at least initially.

The developed countries — notably the U.S., the U.K., the EU and Japan — have the largest markets for goods and services.

Uncertain economic environment in those countries has led to a demand contraction and severely affected the economies of countries which export goods and services to them. In fact, trade has been a major casualty of the crisis. The WTO which had earlier predicted a 9 per cent decline in global merchandise trade this year now says that the decline will be 10 per cent. The downward revision is due to the fact that trade growth will be ‘strongly negative’ this year. Protectionism has already surfaced in many of the developed countries. In the U.S. there is a big official push to buy American goods. Visa rules for computer professionals have been tightened. Security concerns have been cited to keep away investment from specific countries in sectors such as ports and so on. There are many such examples of what UNCTAD (United Nations Conference on Trade and Development), in a recent report, calls ‘smart’ protectionism.

The big challenge for the WTO is to ensure that channels of trade remain open in the face of economic adversity. Well-balanced contingency measures, designed primarily to deal with a variety of unanticipated market situations are necessary to avoid ‘high intensity’ protectionism and to ensure the effectiveness and stability of trade agreements.

Contingency provisions in the trade agreements therefore turn out to be safety valves. When countries resort to them, they no doubt restrain trade flows but their governments get some space for political manoeuvre. They provide temporary relief from import competition, to allow domestic firms some time to make the necessary adjustments. They can also deter certain actions of trading partners.

Since these contingency measures are part of trade agreements, they ought to be viewed as upholding the rule of law: otherwise arbitrary protectionist actions are turned into prescribed and predictable policy measures.

Finally, contingency provisions may simply reflect the reality that the future is uncertain: it is either too costly or impossible to foresee all possible set of circumstances when to regulate government behaviours. Often, contingency measures are introduced in trade agreements to persuade governments to agree to ambitious levels of trade opening. Knowing that they have policy tools for adjustments, governments might agree to open trade channels wider than envisaged. Contingency measures might also preserve the sanctity of agreements. After all, a trade agreement that has in-built provisions for flexibility will be more credible than those agreements that are constantly breached.

Trade flexibilities are not harmless. Theoretically speaking, in the absence of market failures, trade restrictions will cause losses to economic welfare. They may also be used to backtrack on previous commitments.

Contingency measures must therefore be designed in such a way that they strike a balance between flexibility and commitments. The WTR points out that the design of contingency measures should not undermine the role of trade agreements.

Also, the circumstances in which such measures can be used must be clearly spelt out.

Finally, the WTR takes up the issue of whether WTO provisions provide a balance between giving governments necessary flexibilities (to face the ongoing crisis) and limiting the use of these measures for protectionist purposes. The usual safeguards are tariffs and quotas which may be introduced to counter increased imports deemed injurious to domestic industry, anti-dumping duties and countervailing duties which can be used to neutralise the effects of foreign subsidies.

Other policy options

Other policy options such as the renegotiation of tariff commitments, the levy of an export tax and the increases in tariffs up to the maximum legally permissible extent are also discussed. The WTR’s main conclusion is that providing flexibilities in trade agreements come at a price. Exercising restraint is beneficial.

Transparency and effective monitoring of the safeguards will help. Timely and comprehensive reporting of such measures to the appellate bodies concerned will be useful. Member countries of the WTO should exchange information with one another.

More In: Economy | Business