Trade protections could worsen already grim situation

Remember 1982, when the Soviet threat haunted America and China was still a giant backwater that had only just started reforming its economy? Few will recall that it was also the last year in which the volume of world trade shrank. Twenty-seven years later, it is likely to fall once again -- by 2 percent, the World Bank predicts.

It is not just that China's export juggernaut has stalled. Caroline Freund, an economist at the bank, said that most countries for which data are available have reported two-figure decreases in exports this year through November. Exports from Chile, South Korea and Taiwan dropped by about 20 percent. November's figures may have exaggerated the gloom because of a precautionary rundown of inventories and a shortage of trade finance, both of which may be short-lived. But there is little dispute that a serious slowdown in trade is under way.

Overlaying the worsening economic outlook is the lingering threat of protectionism, which could drive trade volumes even lower next year. It is always tempting for politicians to throw up new trade barriers when jobs and wages are at risk, even if such a response, though individually appealing, is collectively futile.

Few fear a return to the punitive tariffs of the Depression, but Richard Baldwin, policy director of the Center for Economic Policy Research, a research network, notes that during the Asian crisis in the late 1990s, some of the afflicted countries raised tariffs and rich countries responded with higher anti-dumping fees. It could be worse this time, he believes, because the crisis is more widespread. India, Russia and Vietnam have raised tariffs already this year. Trade litigation has also picked up. Baldwin said the number of anti-dumping cases jumped by 40 percent in the first half of 2008.

Tariff increases may be the protectionist's barrier of choice, despite limits agreed to by members of the World Trade Organization (WTO). This is because in the past decade, many countries have unilaterally cut tariffs to well below those limits. They have plenty of room to raise them without breaking any rules.

If all countries were to raise tariffs to the maximum allowed, the average global rate of duty would be doubled, according to Antoine Bouet and David Laborde of the International Food Policy Research Institute in Washington, D.C. The effect could shrink global trade by 7.7 percent.

Other, more subtle, means of protection are available. Marc Busch, a professor of trade policy at Georgetown University in Washington, D.C., worries that health and safety standards and technical barriers to trade, such as licensing and certification requirements, will be used aggressively to shield domestic industries as the global downturn drags on.

Closing the back door, too

Subsidy and currency levers can also be pulled to distort trade. A government bailout of the Detroit carmakers would favor those firms over their competitors. China's government is reported to be considering subsidies and higher export rebates for its steel mills. (It already has announced higher export tariff rebates on 3,700 items in an effort to boost its sales abroad.) A recent slide in the yuan has also raised fears of competitive devaluations.

Faced with such threats, there would appear to be an even greater need to complete the Doha round of trade talks. This would help to reduce the gap between actual and maximum tariffs. However, the talks, which have dragged on since 2001, stalled again in July, and a ministerial meeting penciled in for mid-December was postponed.

Since that tremor in 1982, world trade has benefited from more than two decades of increasing openness. Tariffs on goods have fallen from a worldwide average of 26 percent in 1986 to 8.8 percent in 2007. Trade has grown spectacularly -- more than twice as fast, on average, as world output. It has also become more inclusive: Developing countries have nearly doubled their share of world exports since 2000, to 37 percent in 2007.

A rise in protectionism could turn the clock back a long way.