TWN Info Service on WTO and Trade Issues (Feb09/11)
19 February 2009
Third World Network

Concerns over protectionism, North's stimulus packages
Published in SUNS #6637 dated 11 February 2009

Geneva, 10 Feb (Kanaga Raja) -- Several developing countries on Monday voiced concerns over the fiscal stimulus and bailout packages -- running into trillions of dollars -- provided by the developed countries to their individual industries and sectors during the current global economic crisis, and said that these packages need to be analysed for their WTO-compatibility and impact on trade.

These concerns were expressed at an informal meeting of the Trade Policy Review Body of the WTO, which was convened to discuss WTO Director-General Pascal Lamy's report (JOB09/2) on recent trade developments associated with the financial crisis.

The report, issued under the Director-General's own responsibility, highlighted trade-related developments that have occurred since the third quarter of 2008 as a result of, or in the context of, the financial crisis and its impact on the global economy. (see SUNS #6627 dated 28 January 2008).

One developing-country participant at the informal meeting told SUNS that some countries criticized the Director-General's report for being based on media reports. Many developing countries also criticized the financial aid packages provided by developed countries, and said that these need to be analysed in the WTO to see if they are consistent with the rules.

The trade diplomat also said that countries such as Bolivia, Cuba and Argentina were of the view that the TPRB did not give any mandate for Lamy to produce such reports. They were not opposed to a WTO assessment but there should be a discussion at the General Council to provide a mandate, set its parameters and duration.

Another participant said that countries such as Argentina, India, Ecuador, Cuba and Bolivia voiced development concerns at the meeting.

According to trade officials, there were two objectives for the informal meeting: one, for Members to have a first discussion among themselves on what has happened in light of the information that is available; second, to provide the WTO Secretariat with guidance on how they want the monitoring exercise to proceed.

Trade officials noted that the WTO does not have the information so far to really analyse the financial bailouts or the state aids (provided by the developed countries) and come to any kind of conclusion on whether and how they are likely to restrict or distort trade or competition. A lot of these packages are still being put together.

They added however that there was a lot of concern amongst developing country Members about what is in these packages and how much they are likely to impact on trade. Large-scale subsidies to individual industries and sectors can affect trade very seriously indeed, said trade officials.

On trade measures -- tariffs, non-tariff barriers, anti-dumping measures etc -- there has been very limited evidence so far of any serious resort to more restrictive and distorting measures. Trade officials said that while there was an appreciation that so far Members don't appear to be deep in the mire, everybody expects things to get worse before they get better.

Trade officials noted that one measure that was most remarked on at the informal meeting was the re-introduction of export subsidies by the EU on certain dairy products.

Trade officials were of the view that there is a mandate for the exercise, citing paragraph D of the Trade Policy Review Mechanism (on reporting regularly to the TPRB). They acknowledged however that some nervousness has been expressed on the terms of reference and the process, but that this will be sorted out by consulting with the countries concerned. There has been nervousness that the monitoring exercise could turn into an IMF-type policing of the system.

Trade officials referred to Bolivia, Cuba, Venezuela and Argentina as voicing concerns over the mandate and terms of reference.

Trade officials referred to a continuation of the monitoring exercise and that the WTO will be expecting a much better flow of information from governments on measures that they are taking. There is need for more accurate and comprehensive information on trade policies or trade-related policies.

Trade officials added that the Director-General has been given the green light to produce a revised report that is to be circulated around mid-March.

With respect to the conclusions by the Director-General, trade officials said that Lamy was impressed by how serious the debate had been, and that Members have encouraged him to continue. Many or all said that this is a first step and that this needs to be fine-tuned and perfected.

Lamy noted that there were some procedural concerns expressed and consultations will be held to work that out.

On the general question of the WTO's monitoring role, this will be taken up in a more systemic sense in the context of discussion on the orientation of where the WTO is going. All measures should be covered -- whether they have a negative or positive effect on trade. There is need for a holistic view, especially the impact on developing countries.

Meanwhile, speaking to journalists outside the meeting room, Ambassador Ujal Singh Bhatia of India said that there is need for much more analysis and "conceptual clarity" on what is the thread that we are proceeding on. "Are we tracking WTO consistency or are we tracking the trade impact of various measures? We need to have conceptual clarity based on which we need to analyse all measures taken by various countries to combat the downturn and see their trade impact on other countries," he said.

He was also of the view that the fiscal stimulus packages (of the developed countries) would have a bigger impact than tariffs. "For instance, what we believe is that something like $3 trillion of various types of packages have already been announced... that means that this amount of capital is being sucked out of the global system and therefore the debt markets are now very tight for developing country debt, and there are estimates which suggest that the private flows of capital to developing countries, which were about $1 trillion in 2007, will be maybe one-third of that figure this year," the Indian envoy said.

Ambassador Roberto Azevedo of Brazil told journalists that there was a sentiment that the "trend of protectionism is real and that there is a danger if it continues unchecked."

He also said that protectionism is not only about raising tariffs and controlling imports. It's also about subsidies and stimulus packages which could have a tremendous effect on trade, and which are available mostly to countries that have the resources to apply them. Developing countries do not have the means to adopt these kinds of measures. All they have is tariffs.

For developing countries, the least expensive way of protectionism is raising tariffs, and they have room for raising tariffs. The developed countries cannot raise tariffs because they apply tariffs at the level of bound rates already, said the Brazilian envoy, adding that a lot of their measures are directed at subsidies and stimulus packages. Essentially, they "are increasing the capacity of their industry to compete in a way that developing countries cannot."

Ambassador Angelica Navarro of Bolivia told journalists that she had made three points at the informal meeting -- the mandate, objectives and terms of reference, and on the content. According to Bolivia, the Director-General does not seem to have a mandate to do what he has done. She pointed to paragraph "g" of Annex 3 on the Trade Policy Review Mechanism.

(Paragraph "g" on overview of developments in the international trading environment states: "An annual overview of developments in the international trading environment which are having an impact on the multilateral trading system shall also be undertaken by the TPRB. The overview is to be assisted by an annual report by the Director-General setting out major activities of the WTO and highlighting significant policy issues affecting the trading system.)

She noted that the Director-General has not had agreement from all Members to do the report. She said that she had asked for a multilateral discussion before the report so that the terms of reference can be set. "We are not against having a report. We think it is very important... but the main problem is that we wanted to make it with all the Members."

On the terms of reference, she said that what needs to be included is firstly, the purpose or main objective, secondly, how long will this mandate be for the Director-General, thirdly, the periodicity of the report, and fourthly, there should be a different treatment of the developed countries -- which are the origin of and responsible for the crisis -- and the developing countries, which are the victims of the decisions of the developed countries.

With respect to the content of the Director-General's report, Ambassador Navarro said that one main point is that it is not clear where the causes of the crisis are, and it has to be put in black-and-white that it has originated in the United States and in developed countries.

The first thing is to identify the clear cause of the crisis, and secondly, to analyse the bailout packages of the developed countries -- between $3-4 trillion -- to see if they are compatible or not with WTO rules. Also, what kind of trade distortions they are causing and what is meant by subsidies, as well as what is the cost to developing countries.

This has not been answered by the current report, said the Bolivian envoy, adding that there is also need for balance in the report, which is not being seen.

In his introductory remarks at the informal meeting, Director-General Lamy said that "I believe that this is an important initiative in the TPRB. It reflects the responsibility of the WTO to play an active and constructive role in helping to manage the current, very difficult, global economic situation and to promote an early end to the recession and the restoration of strong, sustainable growth in world trade."

The speed with which the economic situation deteriorated since the financial crisis in September last year has meant that there has been little time to carry out the extensive consultations with Members that typically precede an initiative of this kind in the WTO.

Lamy said that he took good note of the concerns that some Members expressed in the General Council last week about the mandate and the purpose of this monitoring exercise. "Let me reassure you that the seeds for this initiative were not sown in Davos, nor in the G-20. This is a home-grown initiative that started in the WTO and that, I believe, should continue in the WTO as long as the global economic situation justifies it."

"I do not believe there can be any doubt that the WTO membership has a responsibility to monitor policy developments that are having an impact on international trade and on the multilateral trading system, nor that all WTO Members have a strong interest in doing so."

"Switching on the radar to provide ourselves with as much information and intelligence as possible about trade-related policy developments around the world is crucial in current economic circumstances, where trade growth has already stalled globally," he said.

"The seriousness of the global economic situation demands that we make a collective effort to improve the prospects for an early recovery. Completing the DDA is by far our most important contribution in that respect. It is also the surest way we have of guarding our individual trade interests and the multilateral trading system against the threat of an outbreak of protectionism."

"In the meantime, we can profitably monitor trade and trade-related developments and use the multiple consultation provisions available to us in the WTO, informal as well as formal, to shape a collective response to problems as they arise - for example, correcting shortages of trade finance - and help to make sure that our markets remain open for business and our trade policies are applied transparently," said Lamy, adding that his report is intended to be a contribution to that exercise. He stressed that it must be viewed as work in progress.

Lamy reiterated the conclusion that he had drawn in his report that, up to now, there has been only limited evidence of increases in trade restricting or trade distorting measures that have been taken in the context of the financial and economic crises.

He said that the very welcome interventions taken recently by President Luiz Inacio Lula da Silva of Brazil and President Barack Obama of the United States to resist domestic protectionist pressures and make sure their economies remain open to competition from abroad "add to my sense that the situation is, broadly speaking, under control."

"I must say, however, that my sixth sense is that we are still at only an early stage in the policy response around the world to the economic recession, and I believe that we must remain vigilant."

In a statement at the meeting, India said that the discussion on recent trade developments associated with the financial and economic crisis, is extremely timely and relevant. However, there is a need to have a clear idea about the role the WTO should play to safeguard the multilateral trading system, India said. If the WTO is to effectively discharge this responsibility, "it is essential that there is conceptual clarity about the nature of the threats to the global trading system and how we can together meet them."

In this context, India put forward three propositions: First, clearly the theory of decoupling was the product of idle minds with a somewhat tenuous hold on reality. The process of globalization provides no safe havens; though the present crisis originated in the developed parts of the world, it is already clear that at least in the longer term, its impact will be disproportionately larger on developing countries; thirdly, perhaps the most urgent challenge to emerge from this crisis will be that of new and innovative form of protectionism. Unless this challenge is effectively and jointly met, the resulting chaos will unravel the consensus which was so painfully built up regarding the beneficial impacts of globalization.

India noted that the demand compression resulting from the economic crisis in developed countries has had an immediate effect on the major export sectors of developing countries like textiles, gems and jewellery, leather products, minerals and metals, marine products etc. The sharp dip in commodity prices has caused great hardship to commodity producers. The slowdown in exports has led to job losses in the millions, often pushing the unemployed back into poverty.

The drying up of liquidity has specially affected the businesses of SMEs, forcing many of them to close down. Difficulties in obtaining trade finance and the increase in risk premia have further added to their problems. Reduced capital flows into developing countries will have an obvious impact on their economic growth. India also said that workers' remittances which are an important part of the incomes of many developing countries have reduced sharply. These added up to $283 billion in 2008. Millions of overseas workers are returning home, adding to the already large ranks of the unemployed.

These trends have the potential to derail very substantially, the growth prospects of developing countries and to set back substantially the achievement of the Millennium Development Goals.

Clearly, the WTO has to play an effective role in combating protectionism. But for that to happen, there must be conceptual clarity about the nature of the beast. If the TPRB is to play a useful role in building common understanding on this issue, it would be useful to recall the objectives laid down in Annex 3 of the Marrakesh Agreement, said India.

"We have to be clear in our minds whether we are approaching the issue of protectionism from the perspective of WTO consistency of any measure or from the larger perspective of its impact on global trade. We cannot have it both ways," said India, adding that "We cannot criticize members for increasing tariffs within bound levels and then turn a blind eye to the global impact of trillions of dollars of bailouts in other countries on the plea that financial measures are outside the remit of the ASCM (Subsidies and Countervailing Measures Agreement)."

In India's view, it is necessary to adopt a commonsense approach. Any measure which can boost trade competitiveness of a country vis-a-vis other countries has to be examined. "This would require our analysis to be holistic and not to be constrained by the boundaries of WTO disciplines."

Specifically, said India, the huge financial bailouts, subsidies or stimulus packages being provided in developed countries will have an obvious impact on export competitiveness. The crowding out of developing countries from international capital markets is one issue which can easily be examined.

"As far as WTO consistency is concerned, WTO consistent packages can be designed to keep out foreign workers or foreign products. But others can play the same game. The dangerous cocktail of financial protectionism and economic nationalism can be extremely insidious in its effect and certainly more dangerous than any other form of protectionism. The twin tracks of Keynes at home and Adam Smith and Hayek for the rest of the world, are clearly unsustainable."

Therefore, said India, it is important to have a fuller analysis of the trade impact of all measures being taken in various countries. JOB (09)/2 (Lamy's report) separates financial measures and bailouts from trade-related policy measures. "Conceptually, such a distinction is meaningless and should be avoided in future efforts." India suggested that in future reports, there should be greater detail on use of trade remedial measures as well as on introduction or changes in non-tariff measures such as standards.

"The possibility of some countries increasing their tariffs to bound levels has been hyped up inordinately. The main threat to global trade does not emerge from this," said India, noting that around three fourths of global trade is already bound in a mesh of binding commitments through preferential arrangements. These cannot be easily reversed.

Also, from whatever evidence is available, developing countries who mostly have the water in their tariffs, have been exercising restraint. India clarified that it has been maintaining a duty of 5% on a variety of steel products since 2004. In April 2008, to control inflation which had jumped to 12%, India temporarily reduced the duty to 0%. Such a reduction was effected on a number of consumption products including food grains. Now that inflationary pressures have eased, the duty on steel has been restored to its original level of 5%.

India raised concerns over a surge of "economic nationalism" in several developed countries with bailout packages and other inward looking measures emerging every few days. Some estimates put the total size of such interventions at $3 trillion.

"We obviously would not like to criticize such interventions because Governments will do what they have to do to salvage their economies. However, such unprecedented interventions in debt markets can have a very serious impact on capital flows to developing countries."

On services trade, India underscored that again, developing countries have shown exemplary restraint and have neither resorted to protectionist rhetoric, nor raised any new barriers. On the other hand, there are worrisome signals emanating from developed countries. In particular, the rhetoric emerging from the UK against foreign workers and the talk of freezing H1B hiring by recipients of government support in the US cannot raise confidence.

Noting the huge bailouts of banks and insurance firms by the US and many European countries, India said that such bailouts may be permissible under the prudential carve-out in the Annex on Financial Services. However, the implications for the financial services commitments of the US and EC, which were made in accordance with the Understanding on Financial Services (in the case of the US by incorporating the Understanding in its head note, subject to specified limitations), are less clear.

"For example, many states in the US did not permit the supply of banking and insurance services by government-owned firms. Based on this, India's state-owned banks and insurance companies were denied market access, not only to those states but to the US in general. By this logic, all state-owned banks and insurance companies such as the AIG now should also not be allowed to supply services in those states, since the US did not take any National Treatment exceptions in financial services."

Such issues need to be clarified and it is necessary that they are discussed by the Committee on Trade in Financial Services (CTFS) in greater detail, said India.

India also said that Lamy's report is a useful beginning. "But it relies too much on media reports and too little on analysis. Such a report is OK for the tabloids but does inadequate justice to the high quality of analytical resources that exist in the WTO."

In its statement, Brazil said that as far as it is concerned, "this is not a witch-hunt, the report has no legal status or implications." It said that the report has "a clear unequivocal pattern: one of emerging protectionism." This is especially worrying because the report covers just the last quarter of 2008, the very early stages of this crisis of unknown duration. Governments barely had time to respond and domestic lobbies are in the early stages of articulating a response to the new economic environment.

Brazil noted that protectionism has many forms. It is not raising tariffs or controlling imports only. Protectionism also includes any form of government intervention that artificially tilts the field in favour of domestic enterprises.

Brazil noted the repeated resort by developed countries to "rescue" or "stimulus packages". It said that these packages often put further strain on already delicate and sensitive economic balances, especially in a time of crisis. They leave long-lasting imbalances that are hard to redress subsequently and are normally too expensive for developing countries. These measures -- mostly introduced in the developed world -- tend to cause distorting effects that either introduce or deepen asymmetries in our interconnected world.

Brazil also said that subsidies are a major element of the rescue and stimulus packages. They distort trade on two fronts. On one hand, they crowd out non-subsidized imports from the domestic market. Also, depending on market circumstances, they promote the dumping of surplus production in third markets.

Brazil noted that on agricultural subsidies, current applied levels of those subsidies are low, but they can -- and most likely will -- increase very quickly depending on price movements. Counter-cyclical programmes, irrespective of their name, act as an in-built automatic income stabilizer for producers to the detriment of developing country producers and exporters.

Brazil also said that South-South trade flows depend heavily on credit availability. The massive rescue packages in the US and Europe will certainly shore up their banks and eventually re-establish some degree of normality to North-South trade financing. This would not be without consequences to South-South trade and "we must revert to this issue in due time."

On the Doha Round of trade negotiations, Brazil said that locking in the progress made over the last seven years of the negotiations is a key ingredient to avoid the clear protectionist trend found in the Director-General's report and its inevitable domino effect that will be extremely hard to reverse later.

In its statement, the United States strongly supported and appreciated the Secretariat's efforts to monitor the trade-related implications of individual economies' responses to the ongoing economic crisis. "There is no doubt that there are significant pressures at home as each of our governments work on responses to the current economic situation - for many, the call to turn inward is strong."

"Like others, the United States is actively taking measures to shore up its financial institutions to promote a return to financial stability and economic growth. While these measures are necessary, clearly, we must take efforts to ensure that the mistakes of history are not repeated. Our President made that clear this week, speaking strongly and clearly on the importance of avoiding protectionism as our Congress continues to shape economic stimulus legislation," said the United States. +