WTO Says Protectionism Could Prolong Recession

Facing pressure to keep jobs at home, leaders around the world have edged closer to protectionism, which could eventually choke global trade and prolong the recession, the head of the World Trade Organization warned yesterday.

Addressing protectionism ranks high on the agenda of the G20 summit next week in London. At their last meeting in November, the leaders of 20 industrialized and developing nations pledged to fight anti-trade policies. In January, the WTO reported no significant increase in protectionism. But a World Bank report released last week found that of the G20 members, 17 have failed to keep that promise, prompting calls by world leaders and others for the group to adopt a tougher stance this time.

A forceful statement against protectionism by the G20 next week is important, even if the countries don't always abide by it, said Gary Hufbauer, senior fellow with the Peterson Institute for International Economics. "If they didn't, it's kind of the open sesame," he said. "The declaration seems kind of empty, but you kind of need it to slow down the juggernaut."

In the latest WTO report, Director-General Pascal Lamy said that in just the past two months there has been "significant slippage" among the world's industrialized and developing nations toward protectionism. The report includes a lengthy list of examples.

"The danger today is of an incremental build-up of restrictions that could slowly strangle international trade and undercut the effectiveness of policies to boost aggregate demand and restore sustained growth globally," Lamy said.

A growing number of countries have raised tariffs, imposed import restrictions or reinstated subsidies. They have also been quick to defend home industries by filing complaints with the WTO over dumping -- the practice of flooding another country with goods at below-market prices. The WTO report also portrayed bailouts as potentially bad for trade because propping up operations of uncompetitive or insolvent firms "denies market share to more efficient producers including foreign suppliers."

Such actions represent a new kind of protectionism that Lamy refers to as "low-intensity." Most of the measures are legal under WTO regulations and don't violate trade agreements that were designed to prevent the kind of full-on global trade war that many believe exacerbated the Great Depression. But they harm trade nonetheless, Lamy argues.

"It's quite worrisome," Hufbauer said. "The longer this recession goes on, the more we're going to get of this."

Some governments have attempted a kind of financial or investment protectionism by requiring financial institutions based in their countries to invest in companies within their borders.

There are no WTO rules prohibiting banks from lending only in their own markets. That gap in trade law has left emerging economies in particular unable to stop financial institutions based in other countries from withdrawing abruptly and effectively shutting down their economies. That is the scenario many Eastern European nations have faced as banks based in Western Europe began retreating last fall in order to shore up their reserves and withstand losses at home. Several countries in the region, such as Latvia and Serbia, have had to turn to the International Monetary Fund for emergency aid.

The global credit crunch itself has hurt trade, Lamy noted in the report. The World Bank has estimated that lines of credit that finance 90 percent of deliveries will dry up this year.

British Prime Minister Gordon Brown yesterday called on the G20 nations to help revive trade by setting up a $100 billion fund that would provide trade finance guarantees. The World Bank, along with the United States and the WTO, backs the concept of a fund.

"The international community cannot stand aside," Brown said at a press conference in the Brazilian capital Brasilia.

The WTO forecast earlier this week that world trade is likely to contract by 9 percent this year, the most since World War II. "There can be no doubt about the fragility of the world economy," Lamy said.