Protectionism Spreads Globally Via Subsidies And Health Rules


Investor’s Business Daily
By Reinhardt Krause
May 19, 2009

Global protectionism is on the upswing, but it hasn’t reached the point of derailing an expected economic recovery. Yet.
Some moves by the Obama administration — such as auto industry subsidies and heavier taxes on U.S. companies’ overseas operations — continue to worry other countries that the new president will follow through on protectionist campaign rhetoric.
The U.S. isn’t the only country that has propped up its local auto industry. The World Bank says proposed auto industry subsidies worldwide reached $48 billion in March, with Brazil, Canada, France, China, Germany, the U.K., Sweden and Italy among those that have provided aid.
The World Bank has warned of a “worrisome” shift away from free trade. Most of the G-20 group of nations that promised to resist protectionism in November have backtracked, it says.

Covert Moves?

Global trade, meanwhile, is forecast to plunge 11% in 2009 because of the worldwide recession. The worry among economists is that countries will engage in less transparent forms of protectionism, rather than overt acts that would trigger complaints to the World Trade Organization.
Protectionism will intensify in covert ways, says Elizabeth Stephens, head of risk analysis at London-based insurance broker Jardine Lloyd Thompson.
“Protectionism takes many forms,” she said. “It’s not just tariffs and imports and exports. It’s about bailouts and nationalizations, subsidies and other things.”
Few governments these days practice blatant protectionism, says Yasheng Huang, an associate professor at MIT’s Sloan School of Management.
Aside from old-style protectionism such as raising import tariffs, countries are using subsidies, licensing requirements, health and safety regulations and anti-dumping investigations to support domestic industries, says Serhan Cevik, an analyst at Nomura.
Europe has opened several antidumping cases against Chinese industries, including candle makers.
In 2008, new anti-dumping investigations rose 31% from a year earlier, the WTO says.
“At this stage, protectionism is a backlash to, not a cause of, the decline in international trade flow,” said Nomura’s Cevik.
William Cline, senior fellow at the Peterson Institute for International Economics, agrees. “You’re not seeing outright violations of trade obligations,” he said.
“The WTO, the World Bank and other bodies are cranking up surveillance and preparing name-andshame reports,” he added.
Still, Cline warns that there is plenty of room for countries to hike tariffs. On average, many tariffs could be doubled under WTO rules.
India imposed the most antitrade measures between last September and March, the WTO says. The European Union, China, Indonesia, Argentina and Russia also took anti-trade steps.
China tightened standards for some imported products from Europe, such as pork, chocolate, brandy and dairy products. India upped tariffs on some types of steel and targeted Chinese toys.
A “pattern is beginning to emerge of increases in import licensing, import tariffs and surcharges, and trade remedies to support industries that have faced difficulties early on in this crisis,” Pascal Lamy, the WTO’s director-general, said in March.

Bailout Bonanza

At April’s G-20 summit in London, governments again pledged to support free trade and check protectionism. But as governments aim to stem rising unemployment, assistance packages to key industries are proliferating, says Nigel Gault, chief U.S. economist at IHS Global Insight.
“Creeping protectionism probably describes it,” Gault said. “It’s not surprising that some protectionist acts are being taken given the backdrop. There is a huge downturn in the global economy.
“There’s a fraying at the edges, not a disastrous breakdown in free trade,” Gault added. “At the moment, it’s not a big deal compared to the macro forces that are driving the global economy. But, we’d be better off without a jump in protectionist measures.”
Government support for key in- dustries is becoming more common.
“It’s partly a natural reaction to the credit crisis,” said Stephens, of Jardine Lloyd Thompson. “There’s domestic pressure, and leaders need to be seen acting. It’s important to see subsidies to domestic industries as a form of protectionism, because they’re protecting home industries against competition.”
The EU has announced new export subsidies on butter, cheese and milk powder. Taiwan has supported its memory chipmakers, while China and France provided loans to automakers.

Government At The Wheel

U.S. loans to General Motors GM and Chrysler — with the likelihood of large or even majority stakes — “put the U.S. in an awkward position,” Cline said.
“We don’t know where that’s going,” he said.
For the U.S. and other countries, the big question is whether, having rescued companies, they’ll stand by as they deal with import competition. Profit margins are under pressure worldwide as companies fight for remaining market share.
Before the credit crisis hit, Cline says, global trade talks aimed at putting limits on government aid to key industries stalemated.
“In the future,” said MIT’s Huang, “foreign governments will seize upon the auto bailout as evidence that the U.S. is practicing protectionism.”
The U.S. sets the tone on free trade globally, Gault says.
In February, the Democratic-controlled Congress passed a “Buy American” provision in the huge stimulus bill, limiting the use of foreign-made materials in infrastructure projects. After major objections from the EU and other trading partners, Obama pressed lawmakers to soften, but not eliminate, the measure.
Congress also has scrapped a pilot program letting Mexican truckers ship goods far into the U.S. In retaliation, Mexico has imposed tariffs on $2 billion worth of American goods.
In early May, Obama proposed a big change in tax rules related to U.S. companies’ overseas operations. Aside from raising revenue, analysts say the proposal aims to slow down the pace of business outsourcing as well as outward capital flows.
Meanwhile, Democrats’ proposed cap-and-trade legislation would let the U.S. impose tariffs on goods from countries that don’t match America’s environmental protections.
The hope overseas is that Obama’s bark is worse than his bite on trade. He has yet to follow through on promises to overhaul the North American Free Trade Agreement.
“The administration,” said Gault, “has taken some acts that could be classified as protectionist, but we haven’t heard much from them about renegotiating Nafta. That’s gone quiet.”
Still, it’s unclear if Obama has the political will — or the inclination — to twist arms and ensure that Congress ratifies trade pacts with Panama, Colombia and South Korea.

All Eyes On China

U.S.-China trade relations are key. Some economists say a sustainable, global economic recovery isn’t possible unless China does something about its current account surpluses.
Since the credit crisis hit, the Chinese government has depreciated its currency vs. the dollar to help its export industries.
In April, the Treasury Department declined to name China as a currency manipulator in a much-anticipated report.
“Trade frictions with China will rise in intensity,” said Huang. “China’s huge stimulus package is still very much aimed to first increase production rather than to increase consumption. This may lead to more structural imbalances in the Chinese economy and greater dependency on foreign markets.”
Some observers say a jump in protectionism created by the credit crisis could restart the long-stalled Doha round of world trade talks. But that’s a long shot, Stephens says.

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