The Sad Truth Behind Growing Clashes at the WTO

Before the financial crisis ushered in the current global economic downturn, there was a strong intellectual consensus among mainstream economists and policymakers about the merits of free trade. The world had seen the spread of pro-competition principles, binding multilateral trade rules, hundreds of so-called free trade agreements, and literally thousands of bilateral investment treaties. Did all this serve to prevent discriminatory and selective state intervention during the crisis era? The number of trade disputes launched at the WTO this year would suggest no. At the current rate, 2012 will easily see more disputes than in the two previous years combined.

This is in spite of a low incidence of new tariffs and quotas—which might seem surprising given how extensively governments resorted to them in the 1930s. But the days are long gone that such tools were the extent of protectionist interventions. As business managers know, tariffs and quotas take time to shift sales from foreign to domestic sources—time they don't have during financial crises, as the credit needed to make payroll and to pay for parts and components dries up. Besides, in sharp downturns, many customers cancel their orders, so there are fewer sales to shift in the first place.

What we've seen instead is selective subsidization—a more direct response to the fact that, at the onset of a crisis, firms need cash more than they need customers. Indeed, so many governments implemented subsidies (thereby delaying reductions in capacity and employment in many sectors and thus distorting trade flows) that we saw the perverse effect for a while that no one brought cases to the WTO. As the saying goes, people who live in glass houses mustn't throw stones.

The governments behind these subsidies weren't only interested in stabilizing their firms. They were also interested in restoring economic growth. In addition to across-the-board monetary and fiscal policy measures, many of them targeted specific sectors and even specific firms as growth poles. This amounts to a revival of the industrial policy that has been pooh-poohed for decades in the US, the UK, and much of the English-speaking world.

Now, disputes have arisen over these crisis-era state efforts at industrial policy, particularly in auto parts, wind power, and solar panels—and also over some pre-crisis industrial policy initiatives, such as those relating to biofuels. But do these formal objections reveal only the tip of the iceberg?

Official sources cannot answer this question, as they don't systematically collect data on industrial policy interventions. Instead we need to consult an independent source. Over the last few years, Global Trade Alert has tracked state measures taken in the course of the downturn that are likely to vary the extent of discrimination against foreign commerce in national markets. Rather than rely on self-reporting by governments, this database is assembled by independent researchers and trade policy analysts located in all regions of the world.

In a forthcoming article, we offer our analysis of GTA's database, focusing on seven leading jurisdictions (Brazil, China, EU, Korea, Japan, Russia, and the US) and finding important differences among them. They gave us plenty of evidence to sift through; out of a worldwide total of over 1500 measures in the three years starting in November 2008, these jurisdictions were responsible for 869.

The EU implemented the most state measures (335) and Korea the least (29). Brazil has the highest percentage of measures that benefit foreign firms or at least don't harm them (41%) whereas Japan and the EU have the lowest (13% and 7% respectively.) This highlights how often the foreign operations of companies have been harmed during the crisis era.

Further analysis of state intervention shows that Japan and the EU combine high levels of discrimination against foreign firms and high selectivity among its own firms, while Brazil does the opposite. The US, Russia, and Korea combine intermediate levels of discrimination and selectivity. Meanwhile, China engages in significant discrimination against foreign firms rather than selectivity among its own firms. So managers shouldn't make assumptions that foreign governments choose their favorites in the same way.

Our analysis shows that it would be wrong to think of discrimination as being solely on nationality grounds ("us" versus "them"). Considerable discrimination among firms has been an important feature of crisis-era policy choice. Given the number of firms on the brink of collapse during the worst of the global financial crisis, referring to such discrimination as "picking winners" seems incongruous. It's more a question of shifting the burden of adjustment (which largely amounts to contraction of output and shedding of excess capacity) from favored firms to their domestic and foreign rivals. Contests for influence over public policy have an added edge for managers during crises.

Why haven't WTO rules stopped all this discrimination from happening? It turns out that the coverage of WTO rules is uneven. For some policies—like tariffs on the imports of industrial goods—the WTO rules are tough. For other policies—such as subsidies or visa restrictions for temporary staff—WTO rules are much weaker, and in certain policy areas, non-existent.

Governments chose to evade the tougher WTO disciplines to different degrees. At the low end, Brazil resorted to weakly WTO-regulated measures in just 12 percent of its measures; at the other extreme, the European Union resorted to them 83 percent of the time. Various forms of subsidies (outright bailouts, trade finance, and investment incentives) account for the high proportions of weakly regulated measures employed by Russia, Japan, Korea, and the EU—although the policy mixes in these jurisdictions vary.

Here's the bottom line for managers: don't count on WTO rules to protect your interests. It is clear that, during the crisis era, policy choice has sought to circumvent the stricter WTO rules. Because so much of this favoritism has taken the form of various subsidies rather than import-reducing measures such as tariffs and antidumping measures, governments have felt they did not have to change their rhetoric. Publicly, they can claim to maintain "open borders" to commerce even as they aggressively shift the odds in favor of a select few.

Don't be misled by the avowed rejections of protectionism. Just because tariffs aren't being raised across the board, it doesn't mean firms' overseas commercial interests are being treated without prejudice. Policymakers' commitment to the level playing field has been tested during the crisis era and found wanting—and managers must now live with the consequences.

This entry was posted in Leadership. Bookmark the permalink.

Comments are closed.