Fair trade, open trade

International trade fell off the charts in the fourth quarter of 2008 and showed only a modest easing in the rate of decline in the early months of 2009. Well-regulated open trade is essential for economic recovery and development, yet in times of crisis, protectionism may appear an attractive solution. It should be resisted.

Protectionism has a high cost. By closing borders or otherwise restricting markets, consumers pay more, firms incur higher costs, and choice is limited. Consider a world with just two traders: you and me. If I no longer import from you, you no longer have the foreign exchange that is needed to import from me. And so on, across the globe. While an individual government might have some success with protectionist policies, as more governments employ the same approach, every country loses. In short, global protectionism means job losses, including in the relatively competitive export sector, to the long-term benefit of no one.

We generally think of protectionism in terms of measures at the border-tariffs, quotas or other mechanisms that restrict trade or make imported products more expensive. But there is a wide array of measures that governments can take behind their borders that have very similar effects-including various forms of direct subsidies. Support to one sector in one country, whatever the motivation, disadvantages competing sectors in other countries. As other countries then move "to level the playing field", a subsidy competition is launched that in the end benefits no country. But those that receive the subsidies may be better off than otherwise, and will vigorously defend their new entitlements. This explains in large part why subsidies to deal with a short-term problem often prove almost impossible to remove.

Developing countries that do no have the fiscal resources to compete on subsidies will be major losers in this situation, finding themselves excluded from protected markets. There is an enormous danger that the important advances made in recent years by some developing countries, helped by aid and by trade, will be lost.

Agriculture, one of the most highly protected sectors in many developed countries, illustrates this point. Support to producers in the OECD region in 2007-a period when many commodity prices were already very high-totalled US$258 billion, of which twothirds highly distorted production and trade patterns. The difficulties in rolling back such high levels of support and protection are well known, as shown in the ongoing conflict in the current Doha Development Agenda negotiations.

Agriculture also illustrates the extent to which the "distributive impacts" can go awry. Most of the benefits of support go to a small number of the largest producers, or leak away to input suppliers or processors. Very little goes to the vulnerable family farms that were the reason for creating the policies in the first place. And of course those competitive suppliers located outside the OECD area are denied an opportunity to compete on an equal basis in many OECD countries and in global markets.

Finally, governments have an opportunity to stimulate economic growth that does not require increased public spending: conclude current World Trade Organization (WTO) negotiations. There is little standing in the way of willing governments quickly moving to do so. Agreement on modalities for agriculture and non-agricultural market access would help pave the way for progress in other areas of the negotiations.

The reductions in levels of protection that are currently "on offer" in WTO negotiations would restrict the capacity of countries to raise protection from current levels in order to protect home industry and would, in many cases, force a significant further increase in market access and reduction in support that distorts trade. This is the case both for agriculture and for industrial goods. Concluding the Doha Round would help to avoid protectionist reactions to the current economic situation. It would also make trade more predictable. This is good for trade and growth because it avoids the disruption to supply chains and to consumers caused when trade can be switched on and off.

Opening markets further would improve overall economic well-being as resources could be used more efficiently thanks to the impacts of specialisation, scale economies, international investment, competition effects, innovation, and so on. According to OECD analyses, the economic gains from the removal of remaining trade barriers would be significant:

A 10% increase in trade is associated with a 4% rise in per capita income.

An "open" FDI climate could be expected to yield a 0.75% increase in OECD area GDP per capita.

Lower regulatory barriers to competition could result in a 2% to 3% increase in per capita GDP in the OECD area.

More efficient customs procedures (i.e. trade facilitation) could improve global welfare by $100 billion.

Full tariff liberalisation in agriculture and industrial goods could increase global welfare by a further $100 billion. Much higher gains would be expected if services trade was liberalised. And these are only "static" gains. In addition, "dynamic" gains associated with trade-related changes to the long-run rate of productivity growth would be many times as large again, providing a further boost to economic prospects.

The reasons for imposing barriers to trade can be economic, environmental, social, political, or a combination of these. Any number of factors may be more important than a particular trade opportunity. But what is important is that such decisions are clear and transparent, and that the benefits and the costs are well understood. Tariffs, even complex schemes, are relatively visible: many non-tariff barriers are much more complex, seldom very transparent, and their impact unclear.

Governments have a particular responsibility to ensure that the full range of impacts of tariff and non-tariff barriers, both intended and unintended, is considered before putting them in place. This is essential if explicit policy objectives are to be met at the least cost and without unintended negative consequences. It is also essential in order to ensure that narrow special interests do not benefit at the expense of others. Experience has shown that even ineffective policies, once in place, are difficult to remove. The "first best" course of action is to avoid poor policy choices.

Excerpt from International Trade: Free, Fair and Open? by Patrick Love and Ralph Lattimore, OECD Insights series, 2009, pp 71-74, ISBN 978-92-64-06024-1 available via www.oecd.org/insights

See more on OECD work on trade on www.oecd.org/trade

You can order this book on www.oecd.org/bookshop

©OECD Observer No. 273, June 2009




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