Protectionism on the rise

Western countries are increasingly resorting to protectionist measures such as 'buy local' clauses in government spending and massive subsidies for their failed companies. Developing countries may be the ultimate victims.

Martin Khor

AS the recession deepens in the Western countries, many of them are resorting to protectionism. This adds to the problems in developing countries which are already facing the effects of the global economic turmoil.

Protectionism is the policy of protecting the markets, industries or jobs of one's own country, usually by restricting the entry of products or services from other countries.

It can take, and is taking, many forms. The most recognisable protectionist method is to restrict im- ports by imposing a tariff, a ban or a quota.

There are also non-tariff trade barriers such as imposing anti-dumping measures or using safety standards as an excuse to block imports.

Protectionism can also take the form of requiring (or giving incentives to) government agencies or companies to make use of locally produced goods and services, thereby putting foreign products at a disadvantage.

Then there are the subsidies that governments give to industries or financial institutions, either to keep bankrupt companies afloat or to strengthen viable ones. Without these state aids, they may fall or be taken over even by foreigners.

If enough subsidies are given, they may even be able to export and at prices below their cost of production, as is taking place in agricultural goods like rice, wheat or chicken coming from the United States and Europe.

Most economists are against protectionism because it is bad overall for the country practising it because the costs of consumer goods or production inputs increase as a negative effect and that may outweigh the benefits of increased local business and jobs. But more importantly, it will invite retaliation from affected countries that leads to 'trade wars' and reduces global trade overall, to the detriment of all parties.

The protectionist measures taken by the US in the 1930s are said to have triggered trade wars and to have worsened the Great Depression.

New forms of protection are now emerging in the global crisis. The most notable is the 'Buy American' clause in the US$787bil stimulus package recently signed by President Barack Obama. It stipulates that only US-made steel and manufactured products can be used in government projects funded by the stimulus package.

When a draft of the stimulus bill containing the Buy American clause was made known a few weeks ago, it led to protests from political leaders in Europe and Canada. Obama then promised that the bill would be amended to avoid protectionism.The final bill adds this line:'This section shall be applied in a manner consistent with US obligations under international agreements.'

This is taken to mean that the Buy American principle would not be implemented if it violates the obligations the US has undertaken under the World Trade Organisation (WTO) and bilateral free trade agreements (FTAs).

This is cold comfort to most developing countries because the WTO's multilateral rules do not forbid a country from having buy-local measures in government projects.

The WTO does, however, have a plurilateral agreement on government procurement (GPA), under which member states agree to open up their procurement business to other members of the agreement through a schedule listing the sectors offered and the extent offered.

There are currently 39 members in the GPA, most of which are developed countries. Only three developing-country members of the WTO - Singapore, Korea and Hong Kong, China - are members of the GPA.

Under the stimulus package, the US is to meet its obligations under the GPA by continuing to open the business in its public-sector projects and expenditure to the other GPA members in line with what it has offered under the GPA.

It is also to keep open its offers contained in the procurement chapter of the free trade agreements it has signed.Only a few developing countries have signed up to FTAs with the US.

The clause that the Buy American condition in the stimulus package will be applied in a manner consistent with US obligations under international agreements seems to have placated the other developed countries, since their companies' market access in the GPA and FTAs will be maintained.

The package also enables least developed countries to have access. However, the LDCs generally lack the supply capacity to take advantage of this.

The larger developing countries, such as China, India or Brazil, that are more equipped to potentially benefit from the stimulus package are the ones that may be affected by the Buy American clause.

France is another country where blatantly protectionist policies are on the rise.

According to a Financial Times report on 3 February, French President Nicolas Sarkozy wants French car companies Peugeot and Renault to commit to buy specific volumes of parts and services from local suppliers in return for soft loans and loan guarantees.

On 6 February, he also called on the two car companies to close their factories in eastern Europe and move production back to France, sparking a protest from the Czech Republic.

The biggest protectionist measures, however, are in the area of subsidies. Until the current crisis the most notorious subsidies were in agriculture, with developed countries providing over US$300bil in state aid to farmers and food companies, and in high prices paid by consumers.

This has enabled otherwise uncompetitive Western farm products to flood international markets, at the expense of developing countries' farmers.

The subsidy phenomenon is now rising in the industrial and services sectors. In industry, most subsidies are banned by rules of the World Trade Organisation. Recently, however, the US Congress approved a US$17.4bil  aid package to two crisis-hit car companies, Chrysler and General Motors.

Some European leaders originally threatened to take action against this US move, but their countries are instead now joining the US to also give subsidies to save their car companies.

Sweden is providing US$3.4bil  to Volvo and Saab in loan guarantees and support for research and development, France has promised US$7.8bil in loans and loan guarantees to its car companies and the  German  finance  minister  said  it  is  'fatal'  not  to  support  German auto  companies  when  the  US  is giving its own firms billions of dollars in aid.

Although protectionism is spreading in the manufacturing sector, it has arrived with incredible force in services, where the US and European governments have doled out more than US$1 trillion in various types of aid to banks, insurance companies and other financial institutions, such as house-mortgage companies.

Without these massive injections of equity, loans and loan guarantees, giant companies such as Citigroup and AIG in the US, UBS in Switzerland and Royal Bank of Scotland in Britain would have gone under.

Developing countries are at a disadvantage because they do not have the same amounts of public funds to bail out their troubled manufacturing companies or financial institutions.

As the recession worsens, more firms and banks in the developing countries will get into difficulties. Not only will their business and very existence be threatened, their markets or equity could even ironically be taken over by giant foreign companies which are massively subsidised by their own governments.

The US was first off the mark with the new protectionism. Europe followed, taking the principle that 'if you can't beat them, join them.' Many developing countries can neither beat them nor join them, simply because they lack the large funds needed to play this subsidy game.             

Martin Khor is Director of the Third World Network.

*Third World Resurgence No. 221/222, January-February 2009, pp 3-4