February 16, 2009
The following briefing note has been prepared by Business Europe on behalf of the Moderator for Session 1, Dr Adrian van der Hoven, at the 2009 European Business Summit. The summit – titled Dare and Care – will be held on 26th and 27th March 2009.
Please feel free to comment before and after the session about the topic below.
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• History has shown that the effect of protectionism on trade, growth and employment is detrimental. Consider that protectionist measures following the financial crisis of 1929 (such as the infamous Smoot-Hawley act) led to a contraction of global trade of 60% between 1929 and 1932, depression and massive unemployment around the world.
• The world today is of course different from the 1920s and 1930s. Although we are once again facing a difficult economic climate, world leaders are denouncing protectionism in international statements underlining that lessons from the Great Depression have been learned.
• However, a quick glance at today’s international newspapers shows that protectionism is still a risk today. Consider the following recent headlines:
o WTO chief warns of trade protectionism
o Vietnam to raise import duties on steel
o Import duties in palm and soya oil likely to rise in 2009
o China worries that downturn might spur protectionism
o Russia raises import duties on cars
• Talk of protectionism is not only due to the consequences of the global economic downturn. The following graph indicates that mentioning of protectionism in the English, German and French speaking press has increased over the past three years. This development begs the question: Is protectionism an increasing concern?
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2. Protectionism: A challenge for European companies
• Within the EU, European companies are faced with many regulatory and administrative obstacles, making it difficult for them to reap the benefits of a 495 million-consumer home market. These challenges include discrimination against companies when bidding for government projects, barriers in the services sector and the absence of a European Private Company Statute.
• European companies are also faced with a large number of tariff and non-tariff barriers (NTBs) when doing business outside Europe. Tariff peaks and specific NTBs exclude European exports from competing on a level playing field. Consider the following examples:
o Russia: tariffs of 27% on motor vehicles and parts
o India: limitation of participation in insurance sector of 26%
o Brazil: average bound tariffs are 29.6% compared to 4% for the EU
3. Protectionism: A concern for the global economy
• A large number of world leaders has committed to refraining from protectionist measures in international statements, The G20 statement reads: “We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports.”
• Despite this statement, governments have not refrained from adopting protectionist measures. Russia has recently raised import duties on cars, pork and poultry. In light of the global economic slowdown, economists expect that other countries will adopt similar protectionist measures.
• An additional challenge is the slow pace of negotiations in the Doha Development Round. Although the G20 statements states that leaders “shall strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO’s Doha Development Agenda with an ambitious and balanced outcome”, no ministerial meeting was called in December 2008 because trade ministers were not showing enough political will to narrow outstanding differences.
• A study by the International Food Policy Research Institute (IFPRI) said more than $1 trillion in world trade could be at risk if Doha was not concluded soon. This figure consists of $336 billion in increased trade from lower tariffs and subsidies in a deal, and $728 billion in lost sales as countries increase tariffs to ceilings allowed under previous deals.
• The role of the World Trade Organisation is key in addressing this challenge. It has a clear role to play in preventing a rollback in liberalisation and promoting greater openness.
• The WTO is both an insurance policy against protectionism – as members have to respect their commitments – and a facilitator of new trade liberalisation – as it provides a platform for trade negotiations. Governments should be committed to tackling protectionism through both fronts.
4. Possible questions
• How do you assess the risk of increasing protectionism in light of the global economic downturn?
• The World Trade Organisation is regarded by some as an insurance policy against protectionism. What role should the WTO play in the current crisis?
• Should the WTO not propose an interim ‘standstill’ agreement to its members to prevent protectionist rollback during the crisis?
• How can governments worldwide provide stimuli for their respective economies and domestic industries while staying within the rules of the international trading system?
• The EU’s Global Europe Strategy has not yet delivered, either on the multilateral or on the bilateral front. How can the EU deliver on its pledge to break down barriers and provide more market access?
• Commission President Barosso has said in 2007 that ‘protectionism would impoverish, not protect, our citizens’. However, a recent publication of the Eurobarometer shows that a significant percentage of EU citizens believe the European Union is too liberal. Why doesn’t the man in the street see the benefits of trade liberalisation?
• There are different visions within the EU regarding protectionism. While French President Nicolas Sarkozy, wants the focus to be on reciprocity, UK Prime Minister Gordon Brown has called on the Union to focus on promoting free trade and openness, with the EU leading by example in breaking down barriers. How does the Commission reconcile these approaches?
• As a global retailing company, have you encountered instances of growing protectionism? What can governments and international organisations do to address this problem?
5. Further reading
• Going Global: The Way Forward (2008).
o BUSINESSEUROPE Study
Speeches & Statements
• Pascal Lamy
o Lamy warns against protectionism amid financial crisis, 24 September 2008
o Restoring citizens’ confidence in trade requires sound domestic policies, 29 October 2008
• Declaration of the Summit on Financial Markets and the World Economy
o G20 Declaration, 15 November 2008
o EU concern at ‘disguised’ US, Japan protectionist agendas, 22 April 2008
• BBC News
o EU Chief warns on protectionism, 15 March 2006
• The Concise Encyclopedia of Economics
o Protectionism, Jadgish Bagwhati