Global Financial Crisis, Protectionism, and World Trading System

1. Global Financial Crisis, Protectionism, and World Trading System Wongun Song Korea Economic Research Institute

2. Global Financial Crisis and World Trade  Global financial crisis caused world trade to reduce sharply. • Pace of reduction in global production • and trade is faster and severer than that of any recent global economic downturn.

3. Global Financial Crisis and World Trade • World trade grew more than 6% a year. (1990-2006) • Reduction of World Trade in 2009 (predicted) : 9% (WTO), 11% (IMF)

4. Global Financial Crisis and World Trade

5. Global Financial Crisis and World Trade

6. Likelihood of Protectionism Global Financial Crisis Rapid and Sharp Reduction in Demand Worsening Profitability and Increase in Bankruptcies Job Losses Incentives to protect domestic firms and industries

7. Risk of Worsening Crisis from the Spread of Protectionism Adoption of Protectionist measures in country A Retaliatory adoption of Protectionist measures in countries affected by measure of country A Trade War Collapse of Global Trade Worsening Global Economic Crisis

8. Protectionist Measures since blowout of Global Financial Crisis Subsidies Tariffs Anti-dumping Other NTBs

9. Protectionist Measures since blowout of Global Financial Crisis  Raise tariffs: Ecuador, Russia, India etc Subsidies to troubled domestic industries: Automobile industry (US, Europe, Canada, China, Brazil etc) Discriminatory procurement provisions in fiscal stimulus bills : ‘Buy American’, ‘Buy Chinese’ Provisions  Anti-dumping : increase in investigations initiated Other Non-tariff barriers: import bans, discretionary licensing requirements

10. Protectionism and World Trading System Protectionism can spread without violation of WTO agreements Spread of protectionist measures that could nullify WTO agreements will lead to collapse of world trading system for free trade 1 2

11. Possibility of global protectionism by competitively raising tariff barriers Raise in tariff rates is the easiest way of protecting domestic industries. MFN applied tariff rates < Bounded tariff rates : can raise tariff rates without violating WTO rules.  Developing nations can raise tariff barriers without violating WTO agreements.

13. Possibility of global protectionism by raising non-tariff barriers  Raising non-tariff barriers : a feasible way for both advanced and developing nations to protect domestic industries.  Possible to abuse non-tariff barriers such as anti-dumping without violation of WTO agreements  Abuse of non-tariff barriers may cause trade wars and spread of protectionism

14. Fiscal Stimulus Bills and World Trading System • Subsidizing troubled domestic industries is included in almost all fiscal stimulus bills. (e.g. automobile industry, steel industry) • It may violate WTO norms but ambiguity remains whether it has broke WTO rules. • Expansionary fiscal policies can be used as a way of subsidizing and protecting domestic industries in a competitive or retaliatory fashion. • Widespread use of subsidies might lead to the dismantling of world trading system constructed by decades of global efforts towards free trade.

15. Ways to Avoid Protectionism Completing Doha Embarking on a New Round Empower WTO for standstill with G20 Agreementon Co-ordinating Fiscal Policy

16. Completion of DDA • Once DDA is completed Tariff rates will be lowered sharply : little room for raising tariff rates Trade barriers such as NTBs (anti-dumping duties, subsidies) will be lowered Use of other protectionist measures will be limited 1 2 3

17. Ways of Enforcing the Standstill Make a comprehensive list of protectionist measures that governments(G20) should not adopt Empower the WTO to monitor the standstill and name those who break it : G20 will need to agree on the rules for enforcing standstill Coordination of fiscal policy : necessary to avoid the competitive use of subsidies to ailing domestic industries. 1 2 3

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