Posted February 2, 2009
2009 Davos


* Crisis could lead to trade backlash unless momentum towards WTO deal is reached
* Fears of financial protectionism cited as banks focus on domestic lending

Davos-Klosters, Switzerland - Finishing the long-stalled Doha Round of multilateral trade talks is the single most valuable step global leaders can take to keep the current economic crisis from triggering a destructive protectionist backlash, according to trade officials and academic experts gathered at this year’s World Economic Forum Annual Meeting.

However, as governments struggle to contain the economic aftershocks of the financial meltdown in developed world credit markets, there is a real risk that steps taken to reflate domestic economies – such as support for troubled automakers or public lending programmes that favour local borrowers – could contribute, intentionally or unintentionally, to the alarming contraction in world trade volumes, participants warned.

A case in point: the fiscal stimulus bill recently passed by the US House of Representatives, which requires that steel used in any infrastructure funded by the package be manufactured in the United States. Although the measure still must be approved by the US Senate and signed into law by President Obama, it represents an alarming indication of the political stresses that threaten the multilateral trade order, participants said.

“We see more and more signs that these protectionist measures in developed countries … fall within some sort of ideology of economic nationalism,” commented Celso Amorim, Minister of Foreign Relations of Brazil. “This could bring us back to the 1930s again.” Many economists blame a round of tariff increases triggered by the US Smoot-Hawley Act, for greatly worsening the Great Depression.

By closing out the Doha negotiations and committing to shepherd an agreement through their respective national parliaments, the G20 countries could provide a concrete demonstration that their commitment to cooperation and coordination to fight the crisis is more than just an empty promise, participants said. “It would send the right signal of confidence that people have realized that this is something they need to do together as part of their reaction to the crisis,” said Pascal Lamy, Director-General, World Trade Organization (WTO), Geneva.

Lamy added that all indications he has received suggest that the G20 leaders are serious about their commitment to the Doha Round. Doris Leuthard, Vice-President of the Swiss Confederation and Federal Councillor of Economic Affairs, echoed this assessment, but also cited the extreme political difficulty of seeking further trade liberalization at a time of rising unemployment in the developed world – particularly since the Doha Round will not address issues such as labour standards and environmental protection that enjoy broad popular support. “We will be having some very tough discussions in my country about how to support free trade when other countries don’t have social protections,” she said.

Lamy, meanwhile, rejected suggestions that the WTO Secretariat should consider enforcement action in response to industrial subsidies or national content measures that appear to violate the WTO treaty. “Those who suggest such things should go back and look at the books,” Lamy said, noting that the WTO process requires that member countries initiate trade actions by seeking consultation followed by enforcement action. The Secretariat’s role, he said, is to monitor possible violations and report its findings to member states. “I will continue to play the not very gratifying role of watchdog,” he said. Regarding the controversial US steel provision, Lamy commented that he “hopes that Senators will be wise enough to make sure that whatever is enacted complies with international law.”

As for the status of the Doha negotiations, Lamy expressed optimism that talks could be concluded quickly if the political will to do so exists. He estimated that 80% of the terms of an agreement have been settled, although highly contentious issues such as agricultural subsidies in the developed world, anti-dumping rules and industrial subsidies still need to be resolved.

The economic crisis, however, may change the calculation of some developing countries regarding the costs and benefits of any proposed deal, warned Mari Pangestu, Minister of Trade of Indonesia. While the proposed reforms in agriculture subsidies and peak tariffs are attractive to the developing countries, “other things have to be on the table for there to be sufficient benefits for us.”

Pangestu also expressed fears that the credit crisis will lead to an increase in financial protectionism, as governments in the developed world encourage their financial institutions to place priority on restarting domestic lending. This could aggravate the sharp decline in capital flows to the developing countries brought about by the crisis, reversing gains in economic and social development seen in recent years. She called for an expansion of existing aid-for-trade initiatives and suggested these could be targeted at helping developing countries cope with the crisis.

Participants refrained from taking sides in the recent debate between the US and China over whether China’s efforts to manage the foreign exchange value of the renminbi constitutes unfair currency manipulation, although Amorim did remark that he believes such complaints are less valid now than perhaps they were in the past. Kim Jong-Hoon, Minister for Trade of the Republic of Korea, argued that currency manipulation is difficult to define under WTO rules. “Let us wait and see how the dialogue [between the US and China] develops,” he said. Pangestu, meanwhile, noted that China’s exchange rate policies have played a constructive role in the past, as when the country resisted competitive pressure to devalue its currency during the 1997-1998 Asian financial crisis.

Kim and Pangestu both agreed that a worsening of trade tensions between the US and China would be a highly unwelcome development for other Asian economies, positioned as they are between the two giants. In the circumstances of the current crisis, participants agreed, economic cooperation between the two countries on trade and other matters is essential.

© Copyright 2009/Exchange Morning Post/Exchange Business Communications Inc.
Submit Press Release
Visitor Centre
Advertising Inquires
Tel: 519.886.0298

Subscribe to Exchange Magazine