During the past six months governments have intervened massively in the financial and real sectors of their economies, reviving debate over policies long considered vanquished. Some governments have turned to protectionism, raising tariffs and other barriers to trade. Others are subsidizing industries or more quietly finessing regulatory policies to advantage domestic “champions.” Surely, the temptation to placate powerful domestic interests will lead other governments toward protectionism in the months ahead.
A sense of foreboding seems to have enveloped the trade policy community, where a common view among scholars, economists, and journalists is that a resurgence of protectionism is inevitable, and that it will cause serious economic damage. In the newspaper columns and in the think tank reports, there is little evidence of any faith that the rules‐based system of trade‐established in part for the purpose of containing and defusing protectionist outbursts‐is equipped to rise to what is arguably the first major challenge in its 62‐year existence.
But that view does not adequately reflect the fact that most governments prefer policies that keep their economies open to trade and investment. Despite some episodes of backsliding, the world is unlikely to witness a significant departure from the trend toward trade and investment liberalization that has been evident since the end of World War II. An increasing number of governments have come to recognize that optimal economic outcomes arise under conditions where policies enhance‐rather than limit‐the freedom of people to transact with others, including foreigners. Protectionism limits choices and thereby undermines human liberty and economic efficiency.
Reasonably well‐respected trade rules and the reality of a global economic system that renders trade openness an imperative for success are some of the reasons to believe that any protectionist outbreak will be fleeting. Indeed, policymakers would be advised to respond to the downturn by reducing their trade and investment barriers unilaterally because doing so expands choices, reduces costs, and spurs the kinds of structural reforms that facilitate economic growth.
A System to Bend but Not Break
One of the reasons for the creation of the rules‐based system of trade was to ensure that the scenario of spiraling, retaliatory protectionism of the 1930s never played out again. Starting with the General Agreement on Tariffs an Trade in 1947, through seven subsequent multilateral rounds of trade liberalization culminating in the establishment of the World Trade Organization in 1995, and into the present, that objective has been upheld.
The WTO/GATT rules encourage trade liberalization, but also grant governments some flexibility to manage their own paces of liberalization and to re‐impose or raise barriers under certain circumstances. The rules distinguish between “Bound” and “Applied” tariff rates. The bound rate is the maximum rate of duty (per product category) that a member can assess against imports, and the applied rate is the prevailing rate of duty (per product category). Generally, the bound rates of developed countries are significantly lower than the bound rates of developing countries. That is, the highest allowable tariffs in richer countries are much lower than the highest allowable tariffs in poorer countries.1
Within the rules, developing country economies are considered more vulnerable to potentially disruptive effects of rapid changes brought about by increased trade and investment. Accordingly, governments of developing countries are afforded greater latitude to respond to those changes. How much latitude depends, to some extent, on the differences between each country’s bound and applied rates. If the applied rate relative to the bound rate is low, then there may be vast room for backsliding and raising tariffs in response to a perceived crisis. For many developing countries, the differences are vast.
India’s simple average bound tariff rate is 50.2 percent, but its simple average applied rate is 14.5 percent. Thus, the Indian government could almost quadruple its tariffs without violating its WTO obligations. Likewise, Brazil has a lot of “overhang” with an average bound rate of 31.4 percent and an average applied rate of 12.2 percent. By contrast, China has far less latitude for backsliding. Its average bound rate is 10.0 percent, and its average applied rate is 9.9 percent. The institutional restraint on China’s backsliding is similar to that on developed countries. The bound and applied rates of the United States are both 3.5 percent, and for the European Union (27) the bound rate is 5.4 percent and the applied is 5.2 percent.2 Many factors affect a member’s bound rates, including its level of development, its duration as a member of the WTO/GATT, and its past negotiating positions, to name a few.3
Other forms of temporary backsliding also are permitted within the system. Members can raise tariffs in excess of their bound rates, impose quotas, and even ban imports altogether under various WTO agreements. The Agreement on Safeguards permits members to impose duties or quotas in response to unforeseen import surges, which seriously injure a domestic industry. Under the Anti‐dumping Agreement, duties can be imposed when a domestic industry is materially injured by reason of imports that have been sold at prices below “normal value.“4 The Agreement on Subsidies and Countervailing Measures permits members to impose duties to offset the injurious effects on a domestic industry from imports that benefit from foreign government subsidies.
Under the rules, imports also can be banned in the interest of public health or safety. Some member countries have used these provisions to exclude imports of beef that were suspected of contamination from “mad cow” disease. Others have banned genetically modified agricultural products on the grounds that the risks of consumption are presently unknown.
Protectionism on the Rise?
C. Fred Bergsten of the Peterson Institute for International Economics finds that “The WTO rules are very porous. If you simply say live up to your rules, you still have massive scope for what I call legal protectionism.“5 But Bergsten sees the glass as half empty. Sure, there is scope for backsliding, but without that scope in the first place the WTO/GATT system likely never would have come to succeed as it has. Governments would have been less willing to formalize commitments and the scope of rules coverage would have been smaller in terms of products and countries involved.
Still even more importantly, the trade rules are not so restrictive that governments obsess over finding ways around them. It is not the existence of the rules that compels countries to liberalize trade. Governments typically are not looking for excuses to raise trade barriers. If compliance were the primary motivation for countries to liberalize trade, we would not observe applied tariff rates that are so much lower than the maximum allowable rates. And we would likely observe much greater use of the various trade remedies across industries and more invocation of restrictions in the name of health and other technical barriers to trade.
Trade liberalization is motivated by self‐interest, and the disparities between bound and applied rates are explained by the fact that most members have a preference for openness. There are real benefits, beyond the reciprocal openings of others’ markets, to keeping one’s own trade barriers low. Nevertheless, governments have been invoking protectionist measures over the past several months. Here are just a few examples:6
- In India, tariffs and other restrictions have been raised on some steel products;
- Ecuador raised tariffs on 940 different products by a range of 5 to 20 percentage points;
- Indonesia limited the number of points of entry into domestic commerce for imported products and is requiring its civil servants to buy only Indonesianmade products; and
- Argentina made licensing requirements more onerous for so‐called sensitive products, such as auto parts, textiles, TVs, and shoes.
And here is how a top‐circulation American daily newspaper described the global flirtation with trade barriers in December: