Trade Winds—Has the Spectre of Protectionism Blown Away?

Tamim Bayoumi

January 5, 2012

The global crisis has pushed trade reforms off—or at least to the edge of—the political radar screen. But shying away from improving the trade system in these tough economic times seems a little like cutting off your nose to spite your face.

The IMF’s First Deputy Managing Director David Lipton summed the issue up in a recent speech: “trade wars can put millions of jobs in jeopardy, while trade integration can be an engine of growth.”

Rising pressures

As the crisis has become protracted and unemployment remains stubbornly high in many economies, there are worrying signs that protectionist pressures may be on the rise. There are plenty of examples: recent actions by Brazil at the World Trade Organization (WTO) aim to use trade remedies to offset currency misalignments, China imposed duties on cars made in the United States, and legislation is pending in the United States to use trade measures to defend against “undervalued” currencies such as the renminbi.

But now is certainly not the moment we should be putting jobs and growth to the test.

Fortunately fears of a widespread resurgence of 1930’s-style trade protectionism after the 2008 financial crisis proved unfounded. This was thanks, in large part, to a shared responsibility by countries and institutions for the multilateral trading system.

Yet, our analysis reveals that advanced economies experiencing the largest increases in unemployment were also those most inclined to impose trade restrictions—as suggested by the number of cases of anti-dumping and countervailing duties initiated against China. In fact, we saw a big uptick in these measures in recent years (see chart).

Macroeconomic barometer

The Fund may not be the main player on the trade ‘block’, but we certainly take an interest given its macroeconomic importance.

In fact, prospects for the global recovery and impending risks to the multilateral trading system were foremost in our minds when, together with the World Bank and WTO, we held a trade conference—the first such event—in December 2011.

Fund staff presented two papers at the conference.

Changing Patterns of Global Trade examined the growing role of vertical integration through global supply chains. It highlights the importance of value-added analysis (as opposed to gross exports) in examining trade inter-linkages and implications for the response of trade flows to exchange rate changes.

Protectionist Responses to the Crisis: Damage Observed in Product-Level Trade found evidence that, while there was no widespread protectionist action and only a limited generalized impact on trade, protectionist measures did have a strong impact on trade in the particular products to which they were applied.

This brings me back to David Lipton’s point—now is the time to resist protectionist pressures and re-energize the process of trade integration. Trade should be able to contribute to, and not detract from, a global recovery.

Which way the wind blows

On this score, reaching agreement on the Doha Development Agenda—the broad deal launched in November 2001 to facilitate development through trade—remains important, and we need to explore fresh approaches to conclude it.

But the multilateral trade agenda needs to go beyond Doha and focus on new emerging issues, such as open regionalism and food and energy security. Without multilateral attention, these issues risk giving rise to unilateral “trade remedies” and deals among smaller groups.

Encouragingly, trade integration is regaining strength through bilateral and regional initiatives.

What’s in the wind?

And, in the spirit of moving forward the discussion, and indeed the policies in support of, trade integration, the IMF has three main lines of work in the pipeline.

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