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World Bank: Financial crisis spawns protectionism

World Bank: Financial crisis spawns protectionism

Zoellick

   Despite a pledge by G-20 leaders last November to avoid protectionist measures, many countries, including 17 of the G-20, have implemented 47 measures since the financial crisis began that restrict trade at the expense of other countries, according to a new World Bank study.

   Effects of these measures are likely minor relative to the size of unaffected markets, but they have a significant negative effect on particular exporters shut out of markets, the international development organization said.

   'Leaders must not heed the siren song of protectionist fixes, whether for trade, stimulus packages, or bailouts,' said World Bank Group President Robert B. Zoellick. 'Economic isolationism can lead to a negative spiral of events such as those we saw in the 1930s, which made a bad situation much, much worse.'

   The study said the inability to adopt the Doha free trade agenda so far means that as the recession deepens many countries might be tempted to raise tariffs to their highest permissible levels to increase agricultural subsidies.

   The World Bank recommended that the G-20 take several steps to stem protectionist actions, such as:

   ' Providing greater transparency through quarterly reports on trade restrictions, and industrial and agricultural subsidies to the World Trade Organization.

   ' Advocating greater aid for trade for low-income countries.

   ' Making progress on technical issues regarding the Doha round even while formal talks are on hold.

   ' Agreeing to promote standard safeguard provisions instead of antidumping duties.

   Tariff increases comprise only about one-third of the restrictive actions taken so far and half for developing countries. For example, Russia raised tariffs on used autos, and Ecuador raised tariffs on more than 600 items. Non-tariff measures include such policies as Argentina's imposition of non-automatic licensing requirements on auto parts, textiles, TVs, toys, shoes, and leather goods.

   Indonesia also ruled that five categories of goods (including garments, footwear, toys, electronics, food and beverages) would be permitted in only five ports and airports.

   In some countries, tightening standards have slowed import entry, the study said. These include China's import ban on Irish pork as well as rejection of some Belgian chocolate, Italian brandy, British sauce, Dutch eggs and Spanish dairy products, and India's ban on Chinese toys.

   The European Union announced new export subsidies on butter, cheese, and milk powder. Export subsidies are particularly egregious because they contravene the draft Doha terms, the World Bank said.

   Meanwhile, China and India have increased the rebate on the duty drawback system for exporters and, although the subsidy component is a matter of discussion, the timing of these measures raises questions, the study said.

   Subsidies proposed for the auto industry have proliferated and total some $48 billion worldwide, mostly ($42.7 billion) in high-income countries. In addition to the U.S. direct subsidy of $17.4 billion to General Motors, Ford and Chrysler, Canada, France, Germany, United Kingdom, China, Argentina, Brazil, Sweden and Italy have also provided direct or indirect subsidies — not including Australia's support to its car dealers and South Korea's and Portugal's support to their component suppliers, the study showed.

   The World Bank said subsidies prevent the rationalization of inefficient industries and may force companies to close more efficient plants overseas while preserving domestic employment.

   The study noted that other protectionist proposals have been defeated, a sign that protectionism is less virulent today than in the 1930s because the global economy is so intertwined throughout the production process, and there is greater legal accountability through the WTO.

   In Brazil, for example, the bureaucracy attempted to impose widespread licensing arrangements and import controls reminiscent of the 1970s, only to provoke a response of outrage from the private sector that led to immediate reversal. Similarly, the more egregious forms of the Buy America provision in the U.S. economic stimulus act were watered down. Moreover, about 10 other proposed and implemented changes in trade policies involved steps toward greater liberalization, mostly related to free trade agreements.

   The full report is available here.

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