TWN Info Service on WTO and Trade Issues (July09/13)
16 July 2009
Third World Network

Lamy reports "further slippage" towards trade protectionism
Published in SUNS #6733 dated 3 July 2009

Geneva, 2 Jul (Kanaga Raja) -- In the past three months, there has been further slippage towards more trade-restricting and distorting policies but resort to high-intensity protectionist measures has been contained overall, albeit with difficulties, WTO Director-General Pascal Lamy said on Wednesday.

In a report (JOB09/62) on the financial and economic crisis and trade-related developments, the WTO chief said that there have been signs of an improvement in the trade policy environment in the form of more governments introducing trade-liberalizing and facilitating measures (36 such measures have been introduced in the last three months).

But there is no general indication yet of governments unwinding or removing the measures that were taken early on in the crisis, said Lamy.

This is the Director-General's third report to the Trade Policy Review Body, reviewing trade-related developments in the period from 1 March to 19 June 2009.

Lamy's two earlier reports were respectively issued in January and March. As with those two previous reports, the third report was produced under his sole responsibility, and according to him, is intended to be a purely factual report.

According to the report, a total of 119 trade measures have been reported by 24 countries plus the 27-member European Union to the WTO Secretariat. Of these measures, 83 can be considered restrictive.

Based on information collected by the WTO Secretariat (and listed in Annex 1 of the report), and without taking into account trade measures associated with the A(H1N1) swine flu pandemic, the number of new trade-restricting or distorting measures announced or implemented since 1 March 2009 exceeds the number of new trade-liberalizing or facilitating measures by a factor of more than two. This compares unfavourably with the general situation prevailing over the past few years when the balance for most WTO Members lay firmly on the side of trade liberalization.

The report finds that in response to the outbreak of A(H1N1) influenza (more popularly known as swine flu), 39 countries have banned the import of various types of pork products or live pigs for various lengths of time.

The sharp contraction of the global economy that began in the second half of 2008 and accelerated into the first quarter of 2009 appears to be slowing down. However, the economic situation is fragile and prospects are still uncertain throughout all regions of the world.

"The financial crisis was concentrated in the developed countries and its effects have been felt most severely there, but the subsequent collapse of aggregate demand in those countries is still working its way through the global economy," says the report.

According to the report, because of the continuing downside risks, the WTO Secretariat has revised its forecast of world merchandise trade in 2009 from a fall in volume of 9% to a fall of 10%. Exports of developed economies are now forecast to fall this year by roughly 14%; the fall for developing economies is expected to be about 7%.

Trade in services has been more resilient so far than merchandise trade, says the report, noting that developing countries remain vulnerable to further worsening of the contraction of both international finance and international trade, falling world prices for export commodities, declining FDI (foreign direct investment), reductions in earnings from remittances and uncertainty over future ODA (official development assistance) flows.

"This is leading to an exceptionally difficult situation for low-income countries that do not have the economic or social safety nets available to withstand such shocks."

The abrupt contraction of trade flows and the belief that the more open economies are bearing the brunt of this decline have led some commentators to argue that trade liberalization has made open economies more vulnerable to the crisis.

The report concedes that opening markets may indeed expose countries to greater volatility, but argues that the response is not to turn away from openness. The report, purporting to be a factual one, does not seem to indicate the facts or evidence for this argument.

Market opening must be accompanied by international rules and by domestic policies that help workers and business face the impact of open competition and volatility of markets, the report says, adding "Many of the open economies that have been badly affected by the global crisis have been enjoying decades of high economic growth and will be better placed to stage a faster and stronger recovery."

The report finds that a variety of new trade-restricting and distorting measures have been introduced since March. There has been a further increase in the initiation of trade remedy investigations (anti-dumping and safeguards) and an increase in the number of new tariffs and new non-tariff measures (non-automatic licences, reference prices, etc.) affecting merchandise trade.

Although some governments have applied new measures to a relatively large number of imports, most have limited their actions to individual products. Trade in agricultural products, in particular, dairy products, and in iron and steel products, motor vehicles and parts, chemical and plastic products, and textiles and clothing, has been most affected by these new measures.

The report says that monitoring the impact on trade of fiscal stimulus programmes and industrial and financial support programmes continues to present a particular challenge because of the paucity of data available, in particular on the specifics of how these programmes are being implemented.

[In the United States, legislation has been introduced in Congress for an audit of the Federal Reserve, now administering and making available almost $2 trillion to various financial and other enterprises. The US Fed has so far not provided such details demanded by Congress or sought under the Freedom of Information Act by media or public interest groups.]

The multilateral trade rules continue to be well respected by WTO Members and are helping to contain protectionist pressures. Nonetheless, until the Doha Round is concluded successfully, there is a large amount of room in which those pressures can continue to agitate.

"Reducing the gaps between applied and bound levels of trade restriction and distortion will substantially strengthen the capacity of the multilateral trading system to help governments resist these pressures. There will still be flexibility available for WTO Members to cope with exceptional circumstances such as the current economic crisis," says the report.

The report argues that Ecuador's recent resort to the WTO provisions that allow the introduction of trade restrictions for balance-of-payments purposes demonstrates that the rules provide scope for developing countries to impose new trade restrictions on a temporary basis and that the need for flexibility in these exceptional economic circumstances can be dealt with consensually in the WTO.

[This view about applied and bound levels of tariffs and trade restrictions is a major unresolved issue in the Doha negotiations on non-agricultural market access (NAMA) -- with the US and other industrialized nations calling on several large developing countries like Argentina, Brazil, China, India etc to bind their applied tariffs, and not leave scope for legally raising tariffs. In effect, Lamy's "factual report" appears to be siding with the views of the industrial countries in these negotiations.]

Pointing to the G20 leaders' meeting in London on 2 April 2009 that committed to "... refrain from raising new barriers to investment or to trade in goods and services, imposing new restrictions, or implementing WTO inconsistent measures to stimulate exports" until the end of 2010, and to "rectify promptly any such measure", the report says that to date, the WTO Secretariat has not been informed by any G20 member that it has rectified any measure.

In addition to examining some current economic and trade trends, the report also highlighted some recent trade-related policy developments.

Based on information collected by the WTO Secretariat on trade measures announced or implemented since 1 March 2009 (Annex 1 of the report), there have been more instances of countries taking trade liberalizing and facilitating measures than in the previous three or six-month periods and fewer cases of new tariff and non-tariff trade barriers.

However, there was widespread resort to restrictions on imports of pork and pork products in response to the A(H1N1) influenza pandemic, increased initiation of trade defence investigations (anti-dumping and safeguards), and two more countries (Switzerland and the United States) followed the earlier lead of the European Communities in introducing new agricultural export subsidies on dairy products.

There has been an increase in the number of new tariffs and new non-tariff measures (non-automatic licences, reference prices, etc.) affecting merchandise trade when compared with the previous six-month period (September 2008 to February 2009).

Agricultural products and iron and steel, motor vehicles and parts, chemical and plastic products, and textiles and clothing have been the products most affected by these measures. Within the agricultural sector, dairy products have been a target for the establishment of a new tariff rate quota and the application of new or increased export subsidies, says the report.

With regards to sanitary and phytosanitary measures (SPS), the report finds that in the period from 1 January through 10 June 2009, 239 regular notifications and 41 emergency notifications were submitted by Members. This compares with 355 regular notifications and 39 emergency notifications for the same period in 2008.

One issue that raises concern is the number of new trade restrictions imposed on live pigs, pork and pork products in response to the outbreak of the influenza A(H1N1) virus. Although various official and non-official (primarily media) sources reported that many countries had imposed import restrictions on these products, and sometimes on additional products as well, only four Members notified their emergency measures to the WTO.

This raises serious questions about lack of transparency of most of the measures, and about the inability of Members to consult with each other in the SPS Committee on the scientific justification for the restrictions.

"The relevant international standard-setting organization, the World Organization for Animal Health, as well as the World Health Organization, have stressed that this virus cannot be transmitted to humans via the consumption of properly prepared pork meat or products, and stated therefore that no trade restrictions are warranted."

Both the number of TBT (technical barriers to trade) notifications and the number of specific trade concerns raised in the TBT Committee have increased in the first part of 2009 compared to the same period of the previous year. The number of TBT notifications reached 637 in the period 1 January to 20 May 2009, compared with 509 during the same period last year.

After a long period of gradual decline from 2001 to 2007, the number of new anti-dumping investigations increased in 2008. The number of initiations went up by 28% (209) compared with those initiated in 2007 (163).

As for the first half of 2009, according to information obtained from a number of official and unofficial sources, as of 19 June, 77 anti-dumping investigations have been initiated in 2009, compared with 86 initiations in the same period in 2008, a decline of 10%.

Safeguards initiations went from eight in 2007 up to 11 in 2008. Available data indicate that 15 safeguards investigations have been initiated between January-June 2009. If this trend continues, there may well be a significant increase in the number of safeguards initiations in the rest of 2009 compared to the recent past.

With the current global economic situation, the second half of 2009 and the first half of 2010 are likely to witness more negative performance by domestic industries and, as a consequence, potentially more safeguards initiations.

According to the report, so far, the crisis has not triggered any generalized protectionist backlash in the services area. While a few Members have taken restrictive measures in some sectors, sometimes in the context of financial bailouts or fiscal stimulus packages, others have pursued further liberalization.

The report also notes that the global financial crisis has led some countries to postpone liberalization initiatives in services sectors. For example, citing the current global financial turmoil and concerns regarding the financial strength of banks around the world, the Reserve Bank of India (RBI) decided - as part of its annual policy for the period 2009-2010 - not to change its policy on presence of foreign banks in the country.

As a consequence, the second phase of the "Roadmap for Presence of Foreign Banks in India", which was supposed to be implemented in April 2009, has been put on hold. That second phase included the extension of national treatment to wholly-owned subsidiaries of foreign banks; the dilution of stake in wholly-owned subsidiaries (so that 26% of the paid up capital could be held by resident Indians); and allowing foreign banks to enter into mergers and acquisitions with any private sector bank in India subject to the overall investment limit of 74%. However, RBI has relaxed some operating conditions affecting foreign banks.

[The report does not make clear whether the "Roadmap for Presence of Foreign Banks in India" is an Indian GATS commitment or something else, and how it falls within the remit of the Lamy report to the TPRB.]

The report notes that a number of new fiscal stimulus programmes and industry and financial sector support programmes have been announced since March 2009, although with the exception of Japan's New Stimulus Package announced in April, there has not been anything comparable in size or scope to the crisis measures that were introduced in the previous six-month period.

As was recognized by the G20 Leaders on 2 April, such large injections of public money into the economy, and of government influence over how it is to be spent, do have the potential also to distort markets and competition.

The report points to two main areas of concern. One is the very limited information that is available publicly, and therefore to a country's trading partners, about how the fiscal stimulus programmes are being implemented, particularly at sub-federal levels of government. This makes it difficult to assess the trade impact of the measures, or the extent to which they are distorting markets and competition.

The report cites the example of "buy/invest/lend/hire local" requirements that are attached, officially or unofficially, to the expenditure of public funds or to the operations of private companies that benefit from these funds. Several cases of "buy local" campaigns, usually at local government levels, have been reported in the past three months.

The second concern is the extent to which public funds that are targeted at specific sectors, industries or individual firms and are provided temporarily to deal with a specific problem are not withdrawn once the problem has been addressed, and instead remain in place.

In the past nine months, says the report, several industries in developed countries, particularly banking and automobiles, have received massive state subsidies to try to prevent individual companies or even whole industries from collapsing. These countries' trading partners, and particularly most developing countries that are unable to provide matching support for their own firms, face highly skewed and unfavourable competitive conditions on world markets until the subsidies are repaid.

"The longer the subsidies remain in place, the more they will distort market-based production and investment decisions globally, the greater will become the threat of chronic trade distortions developing, and the more difficult it will become to correct those distortions," the report adds.

It calls on the G20 countries to design and announce as soon as possible an exit strategy from their crisis measures that will allow world markets to return to normal again.

The report also finds that the financial sector has so far been the prime recipient of government support, and considerably more information has been provided publicly on how the funds are being spent or other forms of government intervention are being carried out.

While some of these measures have targeted specific financial institutions, many others constitute in fact more general "rescue packages" for the whole sector, whose effects will only be seen through time, depending on how they are implemented. From the perspective of trade in financial services, these measures, which in most cases constitute some form of state aid or subsidy, may eventually bring about negative spillover effects on other markets or introduce distortions to competition between financial institutions.

The bailout measures (referred to in the report) may be considered a form of subsidy. The GATS does not contain explicit subsidy disciplines, but some discipline nevertheless exists by virtue of the rules on non-discrimination - the Most-Favoured-Nation and National Treatment provisions. Members' ability to discriminate when implementing subsidy-like bailout measures will have to be assessed in light of their specific commitments on financial services.

Finally, says the report, it is worth recalling that the GATS contains a specific exception for measures taken for prudential reasons (paragraph 2 of the Annex on Financial Services). The most important aspect of this exception is that it does not restrict in principle the freedom of regulatory authorities with respect to the types of measures that can be adopted for prudential reasons.

The carve-out does not prescribe what types of prudential measures are allowed. Rather, it states the objectives that such measures should pursue. Therefore, the carve-out is designed to cover any type of regulatory action that a country might see fit as long as it is for the achievement of a prudential objective, the report adds. +