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What should world leaders do to halt protectionism from spreading?

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In Brief

G20 countries must exercise leadership to wrap-up the Doha Round, fight unemployment with macroeconomic policies and strengthen safety nets to minimize calls for protection. A fund should also be created to assist emerging and developing countries in undertaking counter- cyclical fiscal measures. Regional surveillance processes, as in the 1997 Asian Crisis, could help support politically difficult policy measures.

Protectionist pressures around the world are on the rise. G20 leaders have made a strong commitment to maintaining an open global economy and to resisting the temptation to resort to protection in these difficult times. Yet one participant at the G20 Summit argued for an extensive increase in the common external tariffs of the regional trade arrangement it is a party to.

This sort of protectionism can be contagious. To halt this, world leaders should take three steps.


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1) Make solid progress in the Doha Round

A successful Doha Round is the best insurance policy against increased protectionism. Last July, the mini-Ministerial WTO meeting could have succeeded in concluding a deal on the critical first stage of negotiations (known as ’modalities’). With a push from the leaders, ministers that will be dispatched to Geneva this December could finally seal that deal.

National leaders will have to keep a close eye on the negotiating process to ensure that their political commitments are not undermined by the negotiators. The remaining hurdles include the special agricultural safeguard mechanism for developing countries, the treatment of sensitive farm products in industrialised countries, the sectoral tariff elimination in non-agricultural market access as well as some unfinished business like the issue of cotton and some TRIPS-related issues.

These hurdles can only be overcome with the personal and collective attention of G20 leaders.

National leaders must stay engaged in the Doha talks

G20 countries must lead by demonstrating their willingness to make th necessary compromises. This cannot be left to negotiators because many of the solutions available to national leaders lie outside the narrow WTO negotiations. To make the necessary compromises, leaders must be able to ensure their domestic constituents that they will implement a comprehensive and effective policy package at home to overcome the crisis.

More flexibility from the US and India

Greater flexibility must be shown by the two largest holdouts in July’s negotiation –the US and India. The Bush Administration is eager to have an agreement before its term ends. It does not have a negotiating mandate from the Congress and it cannot assure that the incoming Administration will stand by what it agrees. But the US administration should take this risk, and others should support them. An accord reached by the 153 countries in the WTO could in fact help the Obama Administration focus on this matter soon after the inauguration.

India is facing national elections in May 2009 and therefore may not want to compromise on what their politicians consider as the main safeguards for the livelihood of its subsistence farmers. However, India today is in a much better position than a decade ago or so. It now has the means to use measures other than trade barriers to overcoming the problems facing its poorest farmers. Indian corporate leaders at the 24th India Economic Summit held recently in New Delhi have also spoken unambiguously about the need for all to reject protectionism.

2) Keep the economy growing and strengthen safety nets

Protectionist pressures at home tend to increase with a rise in the feeling of helplessness that overcomes the population in an unfolding economic crisis. To be able to maintain open economies policies governments must show that they have sufficient instruments and resources to keep the economy growing at a reasonable rate and that, especially in developing economies, effective safety nets are in place.

Small open economies are not likely to resort to protectionist measures that would be suicidal given their reliance on trade. They have few options other than strengthening their safety nets to minimise the suffering of its populace. It is the larger economies that could be tempted to turn inward by raising their trade barriers.

To reduce protectionist pressures at home, governments of larger economies should find ways to stimulate their domestic market through monetary and fiscal measures. Several larger emerging economies in East Asia should and could do so. Collectively they could play an important role as an engine of growth for the recovery of the global economy. As such they bring an added benefit in the form of reduced protectionist pressures in other countries.

However, it will not be easy to stimulate the domestic market at a time of financial crisis as the world is facing today. Only emerging economies with huge reserves can readily do so. Others, like Indonesia, will have to make special efforts to mobilise additional external funding since it can no longer rely on international bond markets.

At the G20 Summit in Washington DC, the Indonesian President made a case for setting up a special fund for such a purpose. This was favourably greeted by the World Bank, but further work will be required to make the concept operational. Whatever form this fund takes, its purpose should be to assist emerging and developing countries to undertake counter-cyclical fiscal measures.

In many emerging and developing countries existing safety-net programs provide the most immediate channel for disbursing the resources. However, safety-net programs in many countries need to be become more effective. These efforts should become an integral part of a comprehensive policy package that must be in place in order for governments to be able to effectively resist protectionist pressures at home. An effective safety net program should be seen as a necessary feature in the age of globalisation.

3) Make effective use of regional cooperation arrangements

Regional arrangements can help defuse protectionist pressures. Collective actions in a regional setting can often be useful in supporting individual governments in their efforts to implement politically difficult policy measures.

The ASEAN Surveillance Process as an example

At the time of the 1997/98 Asian financial crisis, ASEAN economic and finance ministers were forceful in opposing inward-looking policies. Several agreements were made to strengthen regional financial cooperation, including the development of an ASEAN surveillance process. It was significant that the crisis was used by the group as a reason to accelerate the implementation of the ASEAN free trade area. They also worked together to ensure that trade financing, which collapsed during the Asian crisis, was quickly restored with the assistance of the international community. As a group, the ASEAN countries also agreed to look into the strengthening of their safety net programs.

The APEC leaders meeting that took place in Peru one week after the G20 Summit have reinforced point 13 of the G20 Washington Declaration on refraining from taking protectionist measures and on working towards a successful conclusion of the Doha Round. This is also a significant development. Apart from the eight overlapping members, APEC has 13 other members from the Asia-Pacific region. Together they should further strengthen the APEC structural reform programs focusing on ‘‘behind-the-border’’ and capacity-building issues. This will be a major effort to help reduce protectionist pressures in the region over the longer term.

This piece originally appeared in A Publication: What world leaders should do to halt the spread of protectionism

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