Backdoor Protectionism

April 2, 2009 Topic: Economics Region: Americas

Backdoor Protectionism

Even though free trade is protected by a number of international organizations, there are still lots of sneaky ways for governments to impose protectionism by stealth.

The first quarter of this year has been a grim one for proponents of freer trade. While the G-20 will undoubtedly call for a successful conclusion of the Doha Round this week in London, no one expects it to happen. Last November the G-20 pledged not to engage in any protectionist policies, but as the World Bank pointed out last month, this was honored only in the breach. The Bank concluded that seventeen of the twenty countries had implemented a combined forty-seven measures to restrict trade at the expense of other countries. With the recession, global trade looks set to shrink for the first time since 1982. The WTO recently predicted a 9 percent reduction in cross-border trade for this calendar year.

Despite these depressing figures, most analysts do not believe that the global economy will see a reprise of the protectionist heydays of Smoot-Hawley. The Cato Institute's Dan Ikenson argued this month that, "Although some governments will dabble in some degree of protectionism, the combination of a sturdy rules-based system of trade and the economic self interest in being open to participation in the global economy will limit the risk of a protectionist pandemic." He has a point. After all, we live in a world of the World Trade Organization, the European Union and NAFTA. Even if there is some protectionist backsliding, no one is going to withdraw from the WTO. Absent that, what's the worst that could happen?

For the record, I believe this sentiment is correct-for now. With each passing month of contracting economies shedding large numbers of jobs, however, politicians will feel increasing pressure to use every tool in their arsenal to protect existing workers. It is an unfortunate rule in politics that industries vulnerable to imports are usually better organized than consumers.

This leads to an interesting thought experiment-could the major trading states enact high protectionist barriers while still complying with their WTO obligations? Unfortunately, this scenario is not too difficult to paint. Consider the following steps:

  1. Antidumping explodes. Countries are allowed under the WTO to apply goods-specific duties if they suspect that the exporting firm is hawking their wares at below-market prices (ignore for the moment the question of why getting a discount is a bad thing). When demand gets slack, antidumping investigations explode. According to Brandeis' Chad Brown, antidumping investigations increased by 31 percent in 2008, while there was a 19 percent jump in the number of applied duties. While antidumping used to be the province of the developed world, Brown's data suggests that developing counties were responsible for nearly three-quarters of these investigations. Which brings us to….
  2. Bound tariffs become applied tariffs. Most of the developing countries in the WTO have two tariff schedules-the maximum rates they can levy (the bound tariff) and the rates they actually use (the applied tariff). For the past decade, the applied tariffs in some countries have been much lower than the bound rates. India's average applied rate is approximately 14 percent; it could raise its tariffs to 50 percent without violating any WTO commitment. Similarly, Brazil could increase its applied tariffs from 12 percent to 31 percent and still be a member in good standing of the World Trade Organization. The International Food Policy Research Institute estimates that if all countries raised their applied tariff to their bound levels, global trade would fall by 7.7 percent over the next five years.
  3. Green sanctions. In March, Secretary of Energy Steven Chu testified before Congress that he was open to the idea of applying additional tariffs on carbon-intensive imports as a "weapon" in case China fails to curb its greenhouse gas emissions. A violation of world trade law, you say? Not necessarily-the WTO hasn't ruled on this issue, and some experts think that such tariffs would be permissible. Of course, China is less than thrilled with this possibility-and for good reason. Green sanctions against China would do little to reduce global warming, because China's carbon-intensive sectors-cement and steel-are largely geared for internal consumption. As a stalking horse for greater protection of domestic industry, however, Chu's proposal will have many supporters.
  4. Non-tariff barriers for everyone!  Even if tariffs are bound, other measures can restrict trade levels. As the "Buy American" debate demonstrated, government procurement practices can be used to block imports. Subsidies to aggrieved sectors (cough, automobiles, cough) in the developed world can also be used to keep out foreign products. If all else fails, large economies can always impose more stringent regulatory barriers.
  5. Currency wars. The WTO has no jurisdiction on the manipulation of currencies as a means to boost a country's balance of trade. In theory, the IMF is supposed to prevent these kinds of tactics. In practice, Beijing prevented the IMF from even talking about the problem. If the dollar falls precipitously in value, expect to see a rash of competitive currency devaluations, and frequent use of the term "beggar thy neighbor".
  6. Real wars. The United States has not been reticent about going to war during the past decade. Russia invaded Georgia last year. China has been making threatening noises in the South China Sea this year. During economic downturns, the incentive to launch "diversionary wars" increases. If a great power engages in an actual war, this is an invitation for other countries to impose trade sanctions of one form or another as punishment.
  7. Get out of the WTO free - for 18 months. Finally, the major trading states-the United States, European Union, China and Japan-can just decide to use their escape clause and ratchet up tariffs as high as they want. This would violate the WTO, and these countries would likely lose any dispute that arose from such a move. Of course, the wheels of trade justice grind slowly. It would take the WTO about eighteen months to finalize such a ruling. When the Bush administration applied steel tariffs in March 2002, they were able to keep them in place until December 2003 without consequence. The European Union still bars hormone-fed beef from the United States, even though the WTO ruled against them. In a worst-case scenario, the WTO disintegrates because countries defy the rules and are judged to be in breach. This lets the complainant countries do what they are allowed to do when there's noncompliance-apply more trade sanctions.

To repeat, this probably will not happen. Too many people benefit too much from cross-border trade for the world to revisit the nineteen thirties. Still, the possibility of a vicious cycle is not zero. Policies like those listed above would dampen economic growth, which would reduce trade levels even further, which would ratchet up political pressure to protect even more. For a free trader like myself, this scenario is vivid enough to give me nightmares for a good long while.


Daniel W. Drezner is a professor of international politics at the Fletcher School at Tufts University and a senior editor at The National Interest. His next book, Avoiding Trivia: The Role of Strategic Planning in American Foreign Policy, will be published by Brookings Institution Press later this month.