Would Current Trade Protectionism Issue Hinder Global Financial Recovery?

Would Current Trade Protectionism Hinder Global Financial Recovery?

This is the issue brought by UK's prime minister, Gordon Brown, Gordon Brown urges focus on repairing world trade

• The prime minister said trade was the "most serious casualty" of the global financial crisis and its collapse the "most immediate issue we face".
  Writing in the Wall Street Journal, Mr Brown called for renewed efforts to ensure that trade barriers are not erected by countries trying to protect their economies, and called for a fresh push to finalise a new world trade agreement
  
  He said: "The simple truth is that trade is the most serious casualty of the global financial crisis, with a vicious circle emerging of falls in exports leading to falls in production and rising job losses leading to further falls in consumer demand.
  
  "We used to think that the countries most affected by the global financial crisis would be those with the largest financial sectors. "But it has become increasingly clear that the countries hardest hit are those most reliant on exports.
  
  "That is why all major economies need to do whatever is necessary to support growth this year and next, managing their economic policies to maintain global demand as we make the necessary adjustments towards achieving balanced global growth."

And it does not help when we hear Buy American. Even the Canadians aren't too happy. Their International Trade Minister Stockwell Day blasts `Buy American' movement

• ``If this continues - the Buy America provisions - people everywhere are going to get hurt,'' Day told reporters after his speech. ``Workers will be hurt in Canada and the United States, and we want to see this turn around.''
  
  Day said the Harper government would like to see U.S. President Barack Obama sign an executive order overruling a decision by Congress to expand Buy American rules that bar Canadian companies from bidding on $787 billion US worth of economic-stimulus projects.
  
  The fallout is already being felt in Canada, as some municipal and state governments are prohibiting Canadian firms from bidding on lucrative infrastructure contracts.

Professor Michael Pettis editorial is worth reading The coming of a US savings culture? as he highlights the trade frictions.

• To continue on trade-related issues, I thought I would refer to an article in last week’s Financial Times with the ominous title “US lawmakers to revive China tariff bill.” According to the article:
  
  A group of Republican and Democratic lawmakers will on Wednesday revive a bill that threatens to raise tariffs on Chinese goods to punish the country for what they call “currency manipulation”. Highlighting the protectionist sentiment within Congress, the bill would let companies apply for tariffs on imports from countries deemed to be deliberately undervaluing their currencies to be more competitive. China is its main target.
  
  “By illegally subsidising its exports through the undervaluation of its currency by 30 per cent or more, China distorts the gains from trade, creates barriers to free and fair trade, harms US industries and has destroyed millions of US jobs,” those sponsoring the bill said in a statement.
  
  Their move comes as countries across the world consider protectionist trade rules in the face of recession. Measures such as anti-dumping investigations rose 18.8 per cent in the first quarter of this year against the same period in 2008, according to research by Chad Bown at the Brookings Institution, with China’s exporters the target in two thirds of those cases.
  
  As I have said many times before, I am very pessimistic about our ability to prevent a sharp rise in trade friction and an equally sharp contraction in international trade. The OECD website is currently running an article called “World trade set to fall 13 percent, OECD urges governments to avoid protectionism” in which they claim that world trade will drop 13% from 2008 to 2009. Not surprisingly China is worried, and today’s People’s Daily discusses one of the now-familiar response:
  
  Chinese Premier Wen Jiabao announced Wednesday that China will shortly send another buying mission to the European Union (EU) to increase imports from Europe. The Chinese trade promotion mission sent to the EU immediately after Wen’s European tour in January had produced positive results, Wen told reporters at the end of the 11th summit between China and the European Union (EU).
  
  “China is ready to work with the EU to further promote mutual investments, enhance cooperation in small- and medium-sized enterprises, trade facilitation, science and technology, transportation and post, in an attempt to fight all forms of trade and investment protectionism,” said Wen. He expressed the hope that the EU will loosen control over export restrictions on high-tech products and nurture new growth potential in economic and trade cooperation in order to further promote China-EU trade.
  
  In spite of the good-will generated by these buying missions (and I am not sure how much good will this really creates — my European corporate friends are extremely cynical about these missions), I don’t think there are a lot of warm and fuzzy feelings about trade anywhere in the world just now. The various claims by interested parties don’t seem to be making the prospects very bright.
  
  To show how confused the debate has become, and how unlikely we are to see a good resolution, I recently participated in a panel with a Chinese economist from a leading local investment bank who gave an impassioned argument against financial protectionism in the US. Among her claims were that China is totally open to foreign investment whereas the US and the West are almost wholly closed to Chinese investment which, she seemed to think, was extremely unfair. This is a claim I have heard so often in China that I am worried that it has become entrenched in local thinking.
  
  The economist argued as evidence of this unfairness that that any foreigner could start a joint venture in China, or engage in any form of FDI, whereas the opposite was almost impossible. But this is mistaken on many counts. First of all, the restrictions on Chinese investments abroad have not been on FDI or other related start-ups and joint ventures. They have occurred when Chinese companies tried to buy large, existing companies that were considered, rightly or wrongly (and more often wrongly, I think), strategic assets.
  
  But, and contrary to what the economist claimed, foreign purchases of equivalent Chinese assets are far more restricted. Almost every large company in China that a foreigner has tried to purchase has been prevented on the grounds of strategic interest, even some amazingly bizarre recent cases, and generally speaking most foreign companies don’t even try to buy large companies in China because everyone expects that transaction automatically to be turned down by the regulators. China, for example, would have never even considered anything similar to the purchase of IBM by Lenovo, and so no foreign company wonders about the possibility.
  
  On the other hand, it is true that foreigners can fairly easily start new companies, enter into joint ventures in China (well, fairly easily – a lot of industries are off limits), and otherwise engage in FDI, but there are likewise almost no restrictions for Chinese investors in the US or elsewhere in the West to do the same. Any Chinese company that wants to start a company in the US from scratch can do so, with very few restrictions that would not apply to US or other fd heeoreign investors.
  
  The point is that many Chinese sincerely believe that the restrictions facing their expansion abroad are much more onerous and stringent than the restrictions facing foreigners in China. Foreigners, of course, sincerely believe the opposite. Both sides feel aggrieved. Regardless of who may be right, the fact is that these very sincere beliefs make accommodation difficult.

And here is OECD views. World trade set to fall 13 percent, OECD urges governments to avoid protectionism

• Speaking at a meeting in Brussels to present a new OECD publication on trade policy, International Trade: Free, Fair And Open?, OECD Director for Trade and Agriculture Ken Ash warned that government actions to discriminate against foreign goods, services, firms or workers “could have a devastating effect in terms of prolonging and deepening the recession.”
  
  1. Consumers would be hurt by higher prices and reduced choice.
  2. Domestic industries would face higher input costs, as a huge amount of trade today is in intermediate goods and services.
  3. Exporters would be penalised twice: through higher costs and through retaliation from other countries. The net effect on the economy would be even bigger job losses than otherwise.

And on the Russian front Protectionism hinders global trade

• ..in May Russia's First Deputy Prime Minister Viktor Zubkov said Russia would apply protectionist measures in agriculture.
  
  "Most countries are using such measures to protect their agriculture. We cannot allow our agriculture to be left without such protection," he said.
  
  Measures to protect Russian agriculture will be discussed at the World Grain Forum in St. Petersburg on June 6-7, 2009.
  
  Not only Russia is focused on agriculture. Europe, the Untied States and Canada are taking extraordinary measures to help their farmers. Assistance to farmers amounts to 16 kopecks per ruble in the United States, 32 kopecks in the European Union, and only 6 kopecks in Russia. Only countries with a more favorable climate, such as Australia and Brazil, spend less on their farmers.

And just a couple of days ago. Japan warns on global rise in protectionism

• TOKYO (AFP) — Japan warned of rising protectionism and unfair trade practices amid the global downturn in a report Thursday, raising concern about a recent "Buy American" plan and China's stricter IT rules.
  
  "Amid the serious economic crisis, protectionist moves are continuously occurring in countries around the globe that are aimed at securing jobs at home," the trade ministry said as it published the annual report.
  
  The ministry said it would prioritise resolving moves by its top trade partners China and the United States as well as India and Russia, and listed 118 policies and measures worldwide that it said restricted free trade.
  
  The government report pointed to the controversial "Buy American" clause and criticised China's plan to require foreign IT companies to disclose key information for a variety of digital products.
  
  The report also listed moves by India to levy tariffs on imports and by Russia to raise tariffs on vehicles.
  
  Earlier this year, US President Barack Obama came under fire for including a clause that said new infrastructure projects must use American-made manufactured materials in his economic stimulus package.
  
  The clause was later softened with a provision that procurements would have to be in line with Washington's international free trade obligations.
  
  "It is regrettable that the United States established such a clause of preferential procurement for national goods," the Japanese report said, adding that the ministry would closely monitor further developments.
  
  Meanwhile, China has said its inspectors would start to examine and certify 13 types of imported IT products, including anti-hacking software, raising fears overseas Beijing would use the process to learn high-tech trade secrets.
  
  Under pressure, China recently postponed the implementation of the rules from this month to May 2010. It also said the certification would apply only to government deals, not all commercial sales.