TWN Info Service on WTO and Trade Issues (Nov09/14)
25 November 2009
Third World Network

Lamy presents past year’s report card on global trade
Published in SUNS #6820 dated 23 November 2009

Geneva, 20 Nov (Kanaga Raja) -- There has been no "severe" protectionist response to the size and suddenness of the economic crisis, Pascal Lamy, the Director-General of the World Trade Organization (WTO), has said in his annual report to the Trade Policy Review Body (TPRB) on developments in the international trading environment.

In his report covering the period October 2008 to October 2009, Lamy said that economic developments over the past twelve months are unprecedented in the history of the GATT/WTO.

The financial crisis and consequent collapse of aggregate demand in Europe and North America created a global economic recession that has dragged down the volume of merchandise trade by over 10% in 2009, back to the level at which it stood in 2005.

Developing countries remain particularly vulnerable to further contraction of their exports, as well as to shortages of bank financing and declining FDI (foreign direct investment), falling commodity prices, reductions in earnings from remittances and uncertainty over future ODA (official development assistance) flows. This has led to an exceptionally difficult situation for low-income countries that do not have the economic or social safety nets in place to withstand such shocks, he said.

"Although there have been instances of slippage, in general terms, the world economy is about as open for trade today as it was before the crisis started. New trade restrictions bore no responsibility for provoking the crisis, nor can they be claimed to have played more than a limited role in aggravating it at the global level."

The report (WT/TPR/OV/12), issued under the Director-General's own responsibility, further said that as recorded in previous reports to the TPRB this year, there has been trade policy slippage, including by most of the G20 countries.

An early response to the effects of the crisis in some countries was to increase tariffs and non-tariff barriers on certain imports. By mid-year, export subsidies on dairy products had been re-instated by the European Union, Switzerland and the United States, and limits to state purchases of agricultural products had been removed in the European Union.

Also, added the report, increased state aid was being channeled to certain services sectors and manufacturing industries, mainly in developed countries. More recently, there has been an increase in the initiation of trade remedy investigations, particularly by emerging economies in the case of antidumping and safeguard measures, and by developed countries in the case of countervailing measures.

The report however noted that no WTO Member has retreated into widespread trade restriction or protectionism, nor has there been any significant instance of trade retaliation. The new trade-restricting or distorting measures that have been introduced since October 2008 (listed in Annex 1 of the report) have covered collectively, at a maximum, 1% of world merchandise trade.

They have been concentrated in particular on agricultural and iron and steel products, followed at some distance by consumer electronics and textiles, clothing and footwear. Although they have certainly curtailed these trade flows, in general, they have by no means brought them to a standstill and their effect on the overall decline in international trade has been secondary to factors such as global credit shortages and lack of aggregate demand.

Nonetheless, said the report, in many cases, they have taken their toll on bilateral trade flows, and in some cases are adding significantly to the adverse effects of the global recession on individual country's exports, economic activity and unemployment.

Many WTO Members, the report further noted, have implemented measures to open up their economies and encourage the expansion of their trade and investment over the past twelve months, some as a deliberate policy response to help deal with the negative effects of the global crisis, others as a continuation of their national and regional programmes of trade liberalization and facilitation.

On the various huge financial and fiscal stimulus programmes, the report said that these programmes to tackle the crisis were introduced by developed countries and some emerging economies, and have undoubtedly had important trade effects. Above all, they have helped to prevent an even bigger decline in international trade than has in fact occurred. Provisional data for the last few months are showing signs of some, albeit hesitant, recovery in trade flows as stimulus programmes begin to take effect and boost aggregate demand.

At the same time, the report said that such large injections of public money into the productive sectors of the economy through state aids and subsidies, and of government influence over how it is spent, clearly have the potential to discriminate in favour of domestic producers and to distort international competition. Specific features of some of the stimulus programmes have caused particular concern.

In particular, it pointed out that "Buy Local" requirements (and their "Hire/Invest/Lend Local" counterparts) have reportedly been attached, officially or unofficially, to some programmes, although by no means all as was shown by the inclusion of foreign banks in some of the financial rescue packages and by the car-scrapping schemes introduced by several countries in mid-year to boost demand for new automobiles.

Noting that many WTO Members have requested more in-depth analysis of the trade effects of these stimulus programmes, the report stressed that very few of the details of these stimulus programmes have been notified to the WTO so that there is limited reliable information available on how they are being implemented.

Also, the exceptional economic circumstances in which the programmes were introduced mean that there is no general model to analyse the trade effects of their components parts in isolation from the broad macro-economic effects of the programmes themselves.

"The fact that the world economy avoided a serious outbreak of trade protectionism in the past twelve months can be attributed in large part to the maturity of the political response to the crisis by developed and developing countries," said the report.

The report found that there has continued to be a build-up of new trade remedy investigations, including by many G20 economies. Virtually none of these investigations have been initiated by governments. They have been initiated in response to petitions filed by the private sector.

"This trend is unhelpful but not unexpected, since historically the use of trade-remedy law by private-sector actors has tended to increase in times of economic distress. Nonetheless, if the trend were to continue and intensify it would give cause for concern that trade restrictions could still weaken the economic recovery," the report cautioned.

The report highlighted two dangers that it said must be avoided in coming months. One is an incremental build-up of trade restrictions. Even if each restriction taken on its own may appear to have had only a slight effect on trade, as they accumulate they will undercut the effectiveness of policies to boost aggregate demand and restore sustained growth globally.

The second danger is that the longer trade restricting and distorting measures are left in place, the more deeply entrenched the special economic interests depending on them will become and the more difficult it will be to remove the measures.

The report recommended that an important step that WTO Members can take now is to devise and announce exit strategies to remove trade restrictions and production subsidies that they have introduced temporarily to counteract the effects of the crisis, and start implementing those strategies as soon as domestic economic recovery takes hold.

According to the report, it has been widely noted by Members in the TPRB this year that the multilateral trading system has coped effectively with the strains placed on it by the economic crisis.

The WTO provided a strong platform on which governments could build their political response to resist domestic protectionist pressures, and its rules have continued to act as an insurance policy for all WTO Members against trade restriction and discrimination and for business to help reduce commercial risk.

However, events of the past twelve months have shown areas where the insurance policy looks decidedly out-of-date and needs to be deepened and strengthened, said the report, pointing to government procurement as one area.

A second is trade-related subsidies. Other than explicit export subsidies (and even then excepting those used to boost exports of agricultural products), WTO rules treat only the symptoms of the trade-distorting effects of subsidies, but not their cause.

A third area where WTO trade disciplines need strengthening, and one that is within immediate reach through the Doha Round, is to close the gap between the levels at which Members have bound their trade policies in the WTO and the levels at which they apply those policies in practice, added the report.

In many Members, this gap has grown wide after years in which they have substantially liberalized their trade policies on an autonomous basis.

The report cited one study (by the International Food Policy Research Institute), produced shortly after the crisis began, that pointed out the extent to which Members could raise their tariffs without breaching their WTO bindings and concluded that, if all of them were in fact to do so, the average global rate of duty would double and the value of global trade would be cut by 8%.

"Closing the gap between bound and applied rates of tariffs and agricultural subsidies will make a major contribution to reinforcing the policy disciplines of the WTO."

"The benefit of an early conclusion to the Doha Round in current circumstances lies in its ability to deliver an economic stimulus package globally that will generate good quality jobs and that does not have to be financed out of over-stretched public treasuries," the report said, adding that it will lower prices for consumers at a time when their after-tax real incomes are under strain. It will also create a global platform on which overdue structural adjustment can be managed.

The world economy has entered a period of reduced aggregate demand that is exposing over-capacity in several global industries, and it is facing fiscal consolidation. Future growth will depend primarily on productivity improvements. The goods and services sectors of open economies are prime breeding grounds for those improvements, and in a post-Doha trade environment, they will prosper, the report said.

[It is developing countries that have unilaterally liberalised and applied lower tariffs than their bound rates on imports of industrial goods, and the "benefits" of their binding at lower rates will accrue mainly to exporters of industrial products from the developed world. As a result, any stimulus effects would be in developed countries. Lamy's report does not explain how such closing of the gap between applied and bound tariffs in developing countries would help stimulate the economies of the developing countries, who have been hit by the financial crisis created in the major developed countries, but do not have the domestic resources to stimulate their economies, as the governments and central banks in US and Europe have been able to do.]

Highlighting some economic and trade trends, the report noted that after having registered a sharp contraction at the beginning of 2009, world trade and output stabilized in the second quarter of 2009, supported by extraordinary monetary and fiscal policy interventions by a large number of governments.

Further noting his report to the TPRB in July in which the WTO Secretariat projected a 10% decline in the volume of world exports for 2009, with developed and developing countries' exports falling by about 14% and 7%, respectively, Lamy said that the Secretariat now believes that this may slightly underestimate the decline in trade.

According to the report, after a long period of gradual decline from 2001 to 2007, the number of new anti-dumping investigations increased in 2008. Between 1 July 2008 and 30 June 2009, WTO Members reported the initiation of 217 new anti-dumping investigations, a 15% increase over the 189 investigations initiated over the previous year-on-year period.

The number of anti-dumping initiations decreased in the first quarter of 2009 compared with the fourth quarter of 2008, but it has steadily increased since then. Furthermore, as the impact of the economic downturn on the performance of domestic producers becomes more widely felt, it seems likely that anti-dumping initiations will continue to increase in the last quarter of 2009.

The number of initiations of countervailing duty (CVD) investigations has also increased significantly over the last four quarters. Twenty-eight CVD investigations have been initiated so far in 2009, including five in October. The third quarter of 2009 has registered a 115% increase in CVD initiations compared with the same period in 2008. If the current trends continue for the remainder of 2009, there could be a new record of CVD initiations surpassing the 41 initiations recorded in 1999, said the report.

Safeguard initiations have also increased significantly in 2009. Initiations started to increase significantly in the fourth quarter of 2008. Up to 28 October 2009, the second-highest number of safeguard initiations since 1995 was recorded, that is, 26 initiations compared to the record high of 34 for the year 2002. The number of initiations in 2008 was 11, the report added.

Members have continued advancing with their programmes of bilateral and regional trade arrangements in 2009. Twenty-five new regional trade agreements (RTAs) were notified to the WTO in the past twelve months, most of them (18) covering trade in both goods and services. This brings the total number of notified RTAs in force to 186, the report further said. +