G-20 may decry protectionism; this time, they might mean it

President Obama and other world leaders will likely emerge from the G-20 summit in London today with a solemn pledge to abstain from protectionism. If that sounds familiar, it's because they issued a similar promise at their last meeting in November — then promptly began violating it as soon as they got home.

Why believe them this time?

Some trade experts say the presidents and prime ministers may actually mean what they say — at least for the moment.

A draft summit communiqué that began circulating this week reaffirms the promise of open markets with some potentially important new specifics. The draft statement provides for the World Trade Organization and International Monetary Fund to report on individual countries' performance in this area, a new wrinkle that could shame countries into better trade behavior.

"I think they mean it," says Gary Hufbauer, an economist with the Peterson Institute for International Economics in Washington, D.C.

Preserving trade flows

Another shift from November: Key developing countries endorse the move to safeguard trade flows. Brazil and China have been among the nations pushing for stronger language in the summit communiqué, Hufbauer says. They "can see a lot of this protectionism is going to be directed at them as the system unravels," he says.

The past six months, global trade has been in a free fall. After growing at an annual pace around 6% in 2007, goods shipments are expected to sink 9% this year, according to the World Trade Organization. Trade is drying up both because of collapsing demand, as the world sinks deeper into recession, and a shortage of routine financing.

Against that gloomy backdrop, economists worry that an outbreak of protectionism could be disastrous.

In recent months, 17 of the 20 G-20 members have implemented new trade restrictions, according to the World Bank. India slapped a 5% duty on imported steel. Indonesia made it more difficult to import celluloid film. Malaysia banned employers from hiring foreign workers for certain manufacturing and services jobs.

But for all the trade war rhetoric, there is plenty of room even within WTO rules for nations to raise tariffs. If countries increased their trade taxes to levels specified by global trade rules, the global tariff average would double, and trade would shrink by an additional 8%, according to the Geneva-based WTO. The draft communiqué for the first time explicitly commits G-20 members not to do so.

A World Bank report earlier this month also said anti-dumping claims in the second half of 2008 rose more than 55% compared with the first six months of the year, as countries scrambled to prevent trading partners from flooding their markets with underpriced goods.

Still, those who oppose further trade liberalization, such as Public Citizen's Global Trade Watch, say most of the individual actions are legitimate domestic policy moves. China, for example, banned imports of Irish pork in December after Ireland confirmed that dangerous levels of the chemical dioxin had contaminated pork shipments to 25 countries.

Some reductions seen

Public Citizen also calls the concern about a potential surge of protectionism exaggerated. Several trade measures included in a recent WTO report, for example, actually involve tariff reductions not increases. Example: Russia reduced its import tariffs on aircraft and major auto parts.

For now, the impact on trade of these measures has been almost nil. And the WTO concedes that "there is no indication of an imminent descent into high-intensity protectionism."

The bigger worry is what happens as the economic downturn lingers. Some officials fear that governments increasingly will be tempted to raise trade barriers to guarantee stimulus funds aren't spent on foreign products. Several nations have imposed requirements for some stimulus money to be spent on domestic goods, including the "Buy America" provision of the recent $787 billion U.S. economic recovery program.

Uri Dadush, a former World Bank economist, says the severity of the global slump coupled with extensive government actions to bolster industries from finance to autos eventually will have an impact on trade.

"If this recession becomes a depression and governments intervene more and more," Dadush says, "it's inevitable that the openness of the world trade system will deteriorate in a very serious way."