Be Wary of the G20

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With the clear intention to prevent the reproduction of the last century’s economic debacle, the leaders of the 20 richest world economies met in London on April 2, 2009 in order to lay down a coordinated plan of action. Although some encouraging steps were taken to tackle the crisis, the brunt of the work is still to be done.

The present global economic situation is inarguably the worst since the 1930s. Forecasts of the Organization for Economic Cooperation and Development (OECD) put growth rates for its 30 economies at -4.3 % for 2009, and unemployment at 36 million later this year. The World Bank has halved its forecasts for developing countries’ growth from 4.4% to 2.1%. The 9% drop in world trade predicted by the World Trade Organization (the first contraction in 25 years) now seems over-optimistic when compared to the 13.9% slump forecasted by the OECD.

The solutions highlighted in the G20 Declaration are a positive step towards global economic recovery. The palliative measures to restore confidence, growth and jobs rightly address crucial issues such as restoring interbank lending, repairing the financial system by addressing regulatory shortfalls, strengthening the effectiveness of international financial organisations such as the IMF and the World Bank, reforming financial supervision and regulatory structures, and promoting global trade and investment by effectively rejecting protectionism.  The annex of the declaration contains the makings of a “road map” to attain most of its objectives.

This is not the case for trade, however. Despite the fact that the G20 declaration described trade and investment as the engine for economic growth, and therefore a fundamental pillar of economic recovery, the only significant trade-related measure in the declaration is a US$250 billion fund for trade financing. While on the one hand this will be of substantial help to emerging and developing economies (itself an important pillar for the recovery of the trading system), on the other, the pledge to fight protectionism remains in the “best endeavours” realm and therefore falls short of having any significant consequence. In fact, the frailty of the trade-related measures stand in stark contrast to the stern warnings issued by the WTO, World Bank and IMF on the dire outcome of a rise in protectionism.

Protectionism has been on the rise for some time now. As governments faced slumping economic growth, rising unemployment and falling exports, they turned to policies that privileged national producers over efficiency in production. Economic nationalism, such as the ”buy America” clause in the US stimulus package, or simply rise in tariff barriers and quotas, as in the case of Indonesia, India, Ecuador or Argentina, have been spreading fast around the world. Financial protectionism is also thriving; bailed-out banks, such as those in Germany, France or the UK are increasingly unable to grant loans to foreign companies or households as a result of government restrictions. The recent experience with the G20 declarations shows that, as far as trade is concerned, best endeavours are not enough to stop or roll-back protectionism.  Indeed, according to a recent World Bank study, only 3 out of the 20 member-countries of the G20 resisted a turn to protectionist policies following the November 2008 G20 meeting in New York (Saudi Arabia counting as one of them).

Change is needed. Politicians need to stop talking the talk, and start walking the walk of concluding the Doha Round of international trade negotiations. Relying on current WTO texts to fight protectionism is made particularly hard given the gap between applied and bound tariffs (i.e. the difference between the applied level and the maximum allowed tariff level). For developing countries, such as Brazil and Argentina, the average bound tariff level is around 30% while the average applied level is 13%. This means that developing countries can substantially raise their tariffs without breaking any international trade laws. This poses considerable problems for producers, whose production networks are spread across many countries. A tariff increase in any one country is likely to disrupt production in several other countries, which could in turn make the whole production system collapse.

The only meaningful way to address these issues is to revive and conclude the Doha Round of negotiations, which have been on the verge of collapse and deadlock for the past 8 years. Furthermore, so much is already at stake. In services negotiations alone, for example, the encouraging July 2008 Signalling Offers risk being lost if a deal is not struck. Governments should take advantage of the fact that the financial crisis has broken vested interests in the status quo. According to economic theory, economic crises motivate policy change since political space for policy innovation is created. Perhaps the current agriculture- NAMA (non-agricultural market access) deadlock could benefit from such policy innovation. Politicians and negotiators also need to learn from the past. Negotiations would indeed be greatly facilitated if an “outward looking” group of countries (such as the Café-au-Lait coalition present during the Uruguay Round) could step forward and broker a deal that would rescind the crippling North-South divide.

Given the high political costs of trade liberalization, best endeavours statements are bound to fail when the rolling-back of protectionism is concerned. The G20 and its soft norm approach to policymaking is therefore not fully equipped to deal with one of the most fundamental pillars of global economic recovery: international trade. Recent studies show that if free trade in services, agriculture and manufacturing was implemented today, global GDP would increase by US$1.661 trillion, US$53 billion and US$700 billion, respectively. Although one cannot reasonably think that the Doha Round would bring gains of this nature (Wold Bank estimates of a deal put combined gains at US$287 billion over time), concluding the round would at worst contribute to restoring badly-needed confidence in the global economy.

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