Protectionism: G-20’s Elephant In The Room

By Vidya Ram
April 2, 2009

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A Latvian farmer explains why it’s destroying his business.

Uldis Krievars has had to make big changes to keep his 400-cow dairy farm in Latvia alive. He’s cut back on feed, canceled construction plans and got some of his tractor drivers to sell milk on the streets. Other Latvian farmers are worse off, pulling children out of school to help out in the field and giving up equipment to the bank. Though there have been just a handful of failures, Krievars says it’s only a matter of time before more farmers have to give up the business.

Latvia’s dairy industry dominates the central and eastern regions of country, but falling milk prices, crushing foreign-currency debts and now "explicit" protectionism is devastating the sector, says Krievars, also chairman of the board of Latvian dairy cooperative Trikata.

Latvia sells between 55.0% and 60.0% of its milk and milk-based products abroad, but exclusive agreements between distributors and manufacturers within individual members of the European Union and protectionist measures by some non-E.U. states like Russia, which recently raised import duties on milk products, has left farmers like Krievars hard-pressed to sell their products abroad. He now has no choice but to sell his milk on the streets at heavily subsidized prices.

Ahead of the G-20 Summit on Thursday, much attention has focused on the need to offer more stimulus spending, greater funding for the International Monetary Fund and financial regulation. But for Eastern Europe, a key issue of concern is protectionism. In a report published last month, the World Bank said it had identified 47 measures "that restrict trade at the expense of other countries," since a November agreement by the G-20 and is now urging countries to take more concrete steps to thwart it.

Protectionism has been noticeable in developing countries, with India banning Chinese toys and China eschewing Italian brandy and some Belgium chocolates, but it’s been devastating for Eastern European, already suffering from a deep lending freeze. One example: French carmakers like Renault who have received bailouts from the government are already leaning towards cost-cutting outside of France, and in the Czech Republic. (See "Renault Keeps France In Work") "It’s key that we get a clear commitment to avoid protectionism, which would be catastrophic for a lot of export-orientated economies in Eastern Europe," said Lars Christensen, head of emerging market research at Danske Bank.

The real danger is that protectionism will spiral out of control as countries introduce tit-for-tat measures. In the past couple of months, Latvia has been hit by a wave of protests by farmers demanding subsidies, costing the agriculture minister his job in February.

Latvia’s problem has been its openness, says Krievars: the country has amongst the lowest subsidies for the agricultural sector within the European Union, which has made the farmers less able to face up to more heavily-subsidized and better-protected foreign competitors in the local Latvian market too. "What we need is an agreement on fair trade and against protectionism," he said. "But it takes two to tango."

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