GLOBAL TRADE: Rule of thumb
The global downturn did not, as many feared, precipitate a repeat of the protectionism that followed the Great Depression in the 1920s and 1930s. However, Pascal Lamy, the director-general of the World Trade Organization, is concerned about the fragmentation of the international network of trade through the imposition of far subtler measures.
“The impact of these measures is like a build-up of cholesterol in the system,” he tells Emerging Markets. “People may not notice it at first, but if not addressed, such activity can clog up the arteries of the global trading system.”
Global Trade Alert, a monitoring body run between the University of St Gallen in Switzerland and the Centre for Economic Policy Research in London, says that in 2010 and 2011, 226 new protectionist measures were put in place around the world.
Between the G20 summit in Cannes in 2011 and the Los Cabos, Mexico summit in 2012, at least 110 measures were imposed – 89 of which were put in place by G20 member states.
The number of measures which, while not directly protectionist, supported domestic industry’s interests over international interests was significantly higher. “While there has not been a massive outbreak of protectionism, we have seen a corrosive accumulation of trade restrictive measures over time,” says Lamy.
The WTO estimates that these measures are affecting around 3% of world trade and 4% of G20 trade – a significant increase over pre-crisis years.
With economic growth slowing, even in previously high-performing markets, and unemployment a major concern in developing and industrialized countries alike, the imperative for politicians to create and protect jobs has become more urgent, and in some cases overwhelming.
The short-term pressure to offer export incentives, discretionary financing, tax rebates and other measures which can operate as de facto protectionism is high, and has been seen not only in countries such as China and Brazil, where industrial policy is well established, but in the US, where the ‘onshoring’ of jobs has crept onto the political agenda ahead of the presidential elections.
“When unemployment levels are high so too are pressures on governments to implement protectionist policies,” says Lamy. “Governments have been reasonably good at resisting these pressures – in most circumstances anyway – but as long as the jobless rate is high these pressures will remain.”
As the financial crisis turned into a world economic crisis, and the eurozone’s sovereign debt issues began to appear so toxic as to threaten the existence of the single currency, another set of government interventions created a new narrative of protectionism and anti-competitiveness on the world stage.
During 2010 Japan, South Korea and Taiwan all made concerted attempts to devalue their currencies. Starting in 2008, the US Federal Reserve’s first two rounds of quantitative easing resulted in over $2.25 trillion to be printed to mop up US Treasuries and free up capital for domestic lending. The third round, which began in 2012, could result in a further $1.7 trillion printed, according to analysts’ estimates.
While the US measure was intended to introduce liquidity into a clogged financial system and the Asian countries’ was to boost competitiveness that had been damaged by inflows into their currency, both had an impact on global trade.
In September 2010, Guido Mantega, the Brazilian finance minister, made a bold and aggressive case that these measures were creating problems for emerging markets. “We are in the midst of a currency war,” he said at the time.
This September, Mantega criticized the Fed’s QE3, saying that it will resolve “lots of problems” in the US, but the depreciation of the dollar “will cause lots of problems for emerging nations”.
In 2010, the Brazilian real was riding high against the dollar, and so-called ‘hot money’ investors, buoyed by the availability of cheap liquidity in developed markets, were pouring capital into higher growth emerging markets. This year, it has slid more than 15% since March, and Mantega reiterated that it would not let the currency appreciate.
“It’s perfectly understandable that you want to go where you get a good yield, and that’s the case with emerging markets,” Gavin Redknap, an emerging markets currency specialist at Nikko Asset Management, says. “It naturally causes problems where you get hot money inflows. But where you get significant hot money inflows, that can cause problems for the currency.”
Brazil, Israel and Turkey all put in place barriers to try to stem the flow of hot money, which had put pressure on their currencies and reduced their competitiveness. While there was considerable criticism of these among market participants and economists from developed markets, Redknap says that there has been a wider reassessment of the received wisdom in controlling inflows to currencies in emerging markets.
“This goes back to the Asian financial crisis, because after that a number of Asian countries started to erect barriers in terms of portfolio inflows,” he says. “At the time there was a lot of criticism about them doing so, but the stability that that engendered has actually been good for those economies.
“What was typically seen as the way to do things, the Washington Consensus – only target inflation and let the currency float – looking at it from a revisionist perspective, that wasn’t the way to go.”
Simon Evenett, an international trade expert and professor at the University of St Gallen who coordinates the Global Trade Alert network, says: “There have clearly been knock-on effects on exchange rates of quantitative easing, and this has led to a lot of frictions – the currency war argument, for example.
“I’m not sure that the governments in question who have undertaken this quantitative easing have done it necessarily with the exchange rate depreciation as the primary goal – but they’re not unhappy with the consequences.”
Perhaps as significantly, the narrative behind the supposed competitive devaluation allowed governments in emerging markets to take the kind of short-termist or protectionist measures that would have been difficult without that context. While quantitative easing may not have been explicit economic nationalism, its result could have been to provoke economic nationalism elsewhere.
“I guess one way of putting it is that QE leading to currency devaluation in the rich countries provides an excuse for policymakers in developing countries who are minded to devalue their currencies or put in place beggar-thy-neighbour policies to do exactly that,” Evenett says. “In that sense it provides the cover for a lot of nonsense in other countries.”
As in the currency area, in industrial policy the prevailing pre-crisis, post-Cold War ideology of the Washington Consensus has been shaken by the apparent failings of the market-led system. The success of China and the resurgence of alternative interpretations of the role of the state in promoting industrial growth have raised significant questions for policymakers in the developing world.
“Nobody has publicly buried the Washington Consensus, but it’s a pretty sickly beast on life support right now,” according to Evenett, who believes that the world is entering an era of policy experimentation, where governments will pick and choose the elements of received ideologies.
Governments broadly understand the benefits of open borders as they relate to supply chains, Evenett says, but at the same time they are increasingly looking to intervene to protect and promote national champions.
CHANGING THE RULES
“There has been a shift in view, and governments have exploited the fact that the WTO rules are very incomplete; in some areas where there are beggar-thy-neighbour measures they don’t exist, like competitive devaluations,” he says. “Essentially what governments have done is not openly flouted the WTO rules, but they have engaged in circumvention.
“What that means is that you’ll get a lot of government officials and WTO officials saying, ‘no, nobody’s breaking the rules’. But that’s not the point. The rules are as threadbare as a revealing bikini.”
The WTO’s Lamy agrees that the organization’s rules need to be updated.
“Our rule book is nearly 20 years old. In some cases, our rules date back to 1947. Of course the rules need to be modernized,” he says. “Everyone agrees that this is the case. The problem is that agreement is far more elusive on which issues should be added to the rule book and which should not.”
This, he says, was what the Doha Development Round negotiations were designed to address. Launched in 2001, these remain deadlocked with little prospect of moving forward in the near future. The various parties are split along lines putting the industrialized world in direct opposition to developing countries around many issues of non-tariff barriers, agriculture and industrial tariffs that remain current today.
“New issues have emerged, and while there is an acknowledgement of this, there are also those who believe that the pressing issues of the 20th century have not been resolved, and that work to address them should not be sidelined to pursue new areas of negotiation,” Lamy says.
“My sense is that we need to be able to ‘walk and chew gum’ at the same time; we must address the issues in the Doha agenda on a step-by-step basis, while looking at issues which have risen in prominence since the Doha Round was launched.”
Asked whether there is likely to be a long-term re-evaluation of the ideologies underpinning free markets and trade – and implicitly the health of the Washington Consensus – Lamy says: “Insofar as the financial crisis has led to economic underperformance and high rates of unemployment, yes.
But if you look at what is happening on the ground, you get a very different picture.”
“Complex and far-reaching supply and production chains mean that today more products are ‘made in the world’ rather than [in] any single country. More than half of world trade is trade in components or parts. In Asia the figure is even higher.
“Companies know that to remain competitive they have to keep costs low and have access to the highest quality inputs. Measures to restrict trade in these goods and services will result in shooting yourself in the foot.”
13 Oct 2012
Peter Guest, Emerging Markets