What can be done to avoid protectionism in the credit crunch?

01 April 2009

As the G20 convenes, can it avoid protectionism? What can developing countries do to support free trade? Could protectionism be a good thing in developing countries? Our panel discusses the current issues

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Harriet Lamb, Executive Director, Fairtrade Foundation

Times are tough for everyone. But they are desperate for millions of producers in developing countries. They are squeezed between today's falling sales and reduced credit, and the continued effect of last year's dramatic escalation of fuel and food prices. Farmers from Uganda to Malawi are literally eating one meal less a day. So now more than ever we need a fair development deal in trade.

Any retreat into protectionism by the world's richest nations would be short-sighted and self-serving. Instead, they must hold their nerve and support those trade deals that will enable developing countries to grow and tackle poverty – so providing the spark for a global economic revival. What we need is an economic stimulus package at an international level.

This would be good for developing countries – and so would be good for the global economy. Witness the vital importance today of emerging powerhouses such as India and China. Having once built up their infant industries and agricultural sectors behind closed doors, they have emerged as dynamic new markets opening opportunities for all.

The crisis has made clear that just as at a national level, markets need managing if they are to serve the needs of the wider economy and society, so too globally. While trade can help stimulate much needed economic growth, it is not sufficient, and must be managed in ways to stimulate development and reduce poverty.

Sometimes that means freeing up trade. The ending of US cotton subsidies (which will lead to the dumping of cheap cotton and depressing of prices in West Africa) would be beneficial, but in other cases, countries need to protect their infant industries or agricultural sectors. The Doha Development Round was supposed to focus on regulating trade to ensure it promotes development. Now more than ever, world leaders need to redouble their efforts to find that deal which will work for developing countries, affording them the special status that they need.

The rising success of Fairtrade shows that trade can be regulated towards development goals and still succeed commercially. In Britain last year, sales of Fairtrade grew by over 43% with more than seven out of 10 people buying the products. These sales, along with consumer research, show that the public are staying loyal to Fairtrade, even when money is tight. Indeed, it may be that Fairtrade meets their more serious mood. In this way, the public are giving governments a mandate to find the big, bold solutions to the crisis that will also work for poor people in developing countries. There is a large constituency crying out for fairer international trade rules, and now is the time to deliver.

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Ben Chapman MP, Chair, All-Party Parliamentary China Group

It is encouraging that members of the G7 have recently re-iterated their pledge to avoid protectionism. China has also made clear that it supports this position. Actions speak louder than words, however, and developed countries must make it clear to emerging economies that restoring international trade remains a top priority. It is more important than ever that developed economies do not become inward-looking, and are aware of their obligations to the international community.

China is, of course, still a developing country. But despite a relative slowdown in 2009 (current estimates suggest that growth will be between 5 and 7%), China's continued progress will ensure that it is central to the global recovery. Beijing has proved itself to be a responsible economic power, and is well aware that the best interests of China, and indeed of the rest of the world, are best served by the revival of global trade and investment flows. As such, China has been critical of what it perceives to be moves towards protectionism. It is imperative that the UK and the European Union continue to work with our partners in the East to seek global answers to global questions, and April's meeting of the G20 provides a further opportunity to do so.

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Duncan Green, Head of Research, Oxfam

It's official. Protectionism is the Great Satan. Gordon Brown decries it in Davos; William Easterly crows over what he sees as Dani Rodrik's conversion to the cause. All countries must eschew protectionism or risk a disastrous return to the trade wars that triggered the Great Depression.

Hang on a minute. For the last decade of highly polarised debates on trade and globalisation, many NGOs, along with economists like Ha-Joon Chang have argued something entirely different, namely that trade tariffs and industrial policy in general have played a vital role in the history of almost every successful economy, but the benefits of state intervention decline as an economy develops.

As economies developed and became more complex, and industries achieved international competitiveness, the costs and benefits of state intervention in both agriculture and industry shifted, and governments started to reduce their role and open up the economy. Exactly the same sequence had previously been adopted by rich countries at an earlier stage of development. Deregulation and liberalisation are thus better seen as the outcomes of successful development, rather than as initial conditions.

In other words, it is not double standards, but history that leads to the argument that protectionism makes more sense in developing countries than in rich ones. This was the historical basis for the growing emphasis by developing countries and NGOs like Oxfam on the need to retain 'policy space' in trade and investment agreements.

Does the advent of a global economic crisis mean that argument no longer applies? If anything, the reverse. Now is precisely the time when developing countries that were hitherto cashing in on the commodity boom should consider whether they want to diversify and upgrade, and, if so, opt for a period of import substitution and hands-on industrial policy.

Don't get me wrong, I still think protectionism is a lousy idea for the North, but we need to be more nuanced when it comes to development. Good thing or bad thing? The answer is (sorry) it depends on who you are and how you do it.

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John Battle MP, Chair, All-Party Parliamentary Group on Overseas Development, Chair, All-Party Parliamentary Group on Poverty, Vice-Chair, All-Party Parliamentary Group for Debt, Aid and Trade

Perhaps we have now moved into a new age of transition economically. As I spelt out at Prime Minister's questions recently, what we do know from all previous recessions is that those with the least – the poor – always suffer most.

Nor in the world (post-1989) of the collapse of communist regimes – and the crisis in international capitalism – has the belief that simply a return to late 20th Century neoliberal economics, focused on growth and the trickle down of wealth, will eradicate poverty. Shoring up a collapsing banking system can only be part of an immediate response to the crisis. What is needed is a refocusing of economics putting the needs of people first, and developing a sense of 'social economics'. Rather than retreat into national and local protectionism (under the guise of defending jobs and resisting movement and migration), now is precisely the time to insist on opening up trade (international movement of goods, services, and people) and on ensuring aid programmes are enhanced, not cut back. Putting development – at home and abroad – right at the heart of new 21st-Century economic thinking enables us to use the present crisis to make a real break through to 'sustainable globalisation from below' – asserting human internationalism and sharing our planet's limited resources more equitably and justly. Dare we at last put the poor first?

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Mareike Meyn, Research Fellow, International Economic Development Group, Overseas Development Institute

The economic downturn will make the conclusion of the WTO Doha Round extremely difficult and it is hard to imagine that members will be able to agree on anything substantive in the near future. Whether this will result in increased protectionism, as argued by some, remains to be seen. To date, there is still little direct evidence that developed countries are putting in place traditional protection measures, such as tariffs. In some developing countries, a large increase in tariffs would be possible (since bound tariffs are higher than current rates), but is unlikely since the countries also have to consider the needs of impoverished consumers (and voters) and domestic producers that depend on imported inputs.

The risk of protectionism appears to be more serious with respect to non-traditional instruments, such as subsidies and new forms of non-tariff barriers. Increased EU subsidies for dairy producers, the bailouts for the US car industry, and several countries' intention to introduce new labelling to encourage support of domestic products (de facto discrimination against imports) are of major concern. The WTO surveillance mechanism aims to monitor such measures, but these are not only difficult to detect but, most of all, controversial to include.

Developed countries should resist domestic pressure to apply new protectionist measures, such as increasing or introducing subsidies. The impact of fiscal stimuli aimed at combating the economic crisis needs to be monitored so as to limit their trade distortive effects that would imply an additional penalty for developing countries.