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The risks to free trade

WTO needs to play a more active role than instead of merely cautioning all concerned about the dismal consequences of impeding free trade

Business Standard  |  New Delhi 

The annual assessment of global trade, released by the World trade Organisation (WTO) recently, portrays a grim scenario at a time when India’s exports have virtually collapsed, dropping by about 20 per cent in recent months, when compared to the corresponding months of the previous year. The WTO projects world trade in 2009 to drop by over 9 per cent, the largest such contraction since the World War II. To make matters worse, trade barriers may be raised as the recession bites. The report also suggests that such protectionism can erode the effectiveness of the efforts to engineer an economic recovery. This decline in trade is in sharp contrast to the long-term trend of expanding trade, with trade growth routinely outpacing growth in production.

Recent decades had seen poor countries buy into the free trade argument; they had lowered trade barriers, including tariffs, and integrated more with the global economy. The present downturn and the rise of protectionism comes therefore at a particular inopportune time, because it is the same poor nations that are most poorly equipped to deal with the shrinkage of trade. They are vulnerable because of concentration on a few products, because they are fundamentally price warriors, and because their economies do not have the shock absorbers that wealthy economies do.

The pity is that while the leaders of the most powerful economies, meeting under the G-20 umbrella, have twice underlined the need to fight protectionism and to prevent countries from falling into the trap of adopting “beggar thy neighbour” policies, they have done little of consequence to demonstrate through action their belief in free trade. Indeed, the World Bank recently listed all the countries that have announced protectionist measures in recent months, with India being included in the list because of its shortlived ban on the import of Chinese toys. Going by the World Bank reckoning, 17 of the G-20 member countries have enforced 47 fresh trade-restricting measures since the G-20 met in Washington late last year. Not only have tariffs been raised, even non-tariff trade barriers put in place by tightening import standards. Indeed, the economic stimulus packages announced by many countries are replete with trade-distorting subsidies and other potentially protectionist measures. The ‘buy American’ provision in the US stimulus packages is a striking example of such protectionism. To top it all, the developed countries have now begun talking about a carbon tax (additional duties on goods produced with non-clean technology), which would serve as a formidable trade barrier against imports from developing countries.

While it is true that the total impact of all these protectionist measures is quite small, the risk is that they could mark the beginning of a slide down a slippery pole. The WTO, as the global trade regulator, needs to play a more active role than instead of merely cautioning all concerned about the dismal consequences of impeding free trade. Indeed, while WTO is likely to be flooded with complaints against such measures from the affected exporting countries, it may be worthwhile for it to take suo motu action as well if it finds that some of these actions are incompatible with the trade norms set by it under the globally consented trade pact. Otherwise, mayhem in international commerce could turn out to be not very far away.

First Published: Tue, April 07 2009. 00:27 IST