Experts analyze how increasing protectionism by the G20 countries – especially Russia – could lead to a slowdown in global trade and hamper Russia’s further integration into the world economy.
Filipino activists wear colourful masks during a rally against the economic liberalization policies pushed by the World Trade Organization. Source: AP
Ahead of the World Economic Forum in Davos next week, both Russian and Western experts are taking a closer look at the recent surge of protectionism around the world and its implications for the growth of the global economy. This has special significance for Russia, which was ranked as the most protectionist country in the world in 2013, according to Global Trade Alert (GTA), a leading independent trade monitoring think tank.
As Reuter’s reports indicate, Moscow is responsible for 20 percent of beggar-thy-neighbor measures identified throughout the world by GTA. These policies include cuts in foreign worker quotas, a host of trade restrictions and state support for aircraft makers, companies in the rare earth metals industry and firms in the agricultural sector.
"It looks like 2013 will confirm the surge in protectionism seen in 2012. No amount of wishful thinking can hide the fact that there is little restraint built into the system," GTA's coordinator Simon Evenett told Reuters.
GTA data also indicates that Argentina, India, the United Kingdom, France, Brazil, Japan, and the EU are responsible for a large share of protectionist measures in the world.
“Experience has shown that the initial assessment of recent government policies towards cross-border commerce underestimate the true extent of state intervention,” the 2013 GTA report said, pointing out the danger that non-G20 countries could choose to copy policies taken by the governments of the 20 largest economies and use it as “a rationale or excuse.”
Russia Direct interviewed experts and leading economists to find out what threats increasing protectionism poses for globalization and how nations are adjusting to the new economic reality. In addition, they talk about the implications of Russia’s protectionism for its relations with the U.S. and the EU.
Bernard Sucher, a member of the board of directors at Aton Group. Previously, he worked in operations of financial institutions such as Bank of America-Merrill Lynch, Troika Dialog, Alfa Capital and Goldman Sachs
Eight decades ago, at the outset of the Great Depression, leading trading nations tried to boost their economic fortunes by increasing trade barriers. These policies were counterproductive and made things worse. Facing the beginning of what some people call the Great Recession in 2008, the political leadership of the G20 was careful to encourage countries to avoid protectionist policies.
And while these intentions have not always been realized, the world as a whole has done an admirable job under stressful circumstances of keeping trading channels relatively clear. We don’t have the numbers yet for 2013, but since 2009, global export dynamics, while predictably subdued, have nonetheless been rising every year (according to the WTO, for example, global exports rose 2.5 percent in 2012).
The WTO must adapt to an environment where regional trade deals are easier to reach than global agreements. It is interesting that the WTO’s new Brazilian Director General, Roberto Azevêdo, brings to the job his own experience with MERCOSUR, South America’s principal regional trading pact.
It is probably a coincidence, but nonetheless a welcome one, that shortly after his appointment, the WTO struck in December its first multilateral agreement in years, with 159 countries signing off on a reduction of customs bureaucracy. I would not dismiss the WTO’s potential as a vehicle to further improve the global economy.
In fact, in the teeth of the crisis, two of the most ambitious trade agendas in modern times have advanced greatly – the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Either of these deals, if finalized, could be potentially historic in scope and impact.
According to Georgetown Professor Harley Balzer, who made a comparative study of the development of China and Russia since 1979, China embraced globalization and Russia did not. For the Chinese, globalization was a great opportunity to overcome backwardness and escape poverty. For Russia, alas, globalization was understood as an American plot.
I am afraid that there is still too much truth in this observation. Look at what is going on today. While the EU and the USA work on what could be the biggest trade deal in history, the TTIP, Russia doesn’t even ask for a seat at the negotiating table. We see instead Russia subsidizing its cost arrangements with broken and tiny economies like Ukraine and Kirgizstan. What good for the nation will come out of that kind of thinking?
Infographic by Natalia Mikhaylenko. Source: The 2013 GTA report.
Alexey Rey, Head of the Center for Industry Studies at the Institute for U.S. and Canadian Studies of the Russian Academy of Sciences
Protectionism and the free trade movement are two sides of the same coin, and this coin is called "international competition." National or supra-national authorities (such as the EU) resort to protectionist or trade liberalization steps for several reasons: lobbying by influential domestic and transnational corporations and other interest groups, preparing bargaining chips to extract concessions from other nations, or striving to achieve foreign policy goals.
The economic international order today is very peculiar (and almost unprecedented) in that most manufactured goods hail from China, or South East Asia, or other developing economies with low wage rates. Developed economies rely heavily on imports and on the existing globalization pattern. Protectionism in its old forms has no place in the modern world, especially given the fiscal woes of many a government after the Great Recession of 2007-2010. In the foreseeable future, there's no alternative to a globalized world.
However, not all developed countries are happy with this reliance. We have seen a two-pronged trade diplomacy offensive by the United States. There, protectionism takes the shape of free trade agreements without China (or Russia), which is meant to put pressure on those left behind – we can see this with the Trans-Atlantic Trade and Investment Partnership and the Trans-Pacific Partnership.
Most multilateral economic institutions today, including the WTO and the International Monetary Fund, have outlived (and accomplished most items on) their initial agenda, and as usual with bureaucracy, are seeking to find new mandates to justify their existence.
The recent resurgence of Russian protectionism is completely different. Under the restrictions imposed by the long-awaited WTO accession, the Russian government issues flurries of non-tariff support measures to keep Russian agriculture and other less competitive industries afloat. To reach bargains across countries in Eurasia (and force some of them – like Ukraine – to change political alignment or share national enterprises with Russian quasi-state companies), it employs the whole gamut of negative trade incentives both unilaterally and within integration agreements.
To put things into perspective, protectionism is the least of the woes plaguing Russia or its image abroad, the "icing" on the cake, no more. Rapid loss of science and educational potential, rampant corruption, and lack of rule of law are much more painful for the image of the country. This doesn't mean that Russian protectionism has no impact on relations with the European Union or the United States. It is simply part and parcel of larger issues, like the heated debate on Ukraine's political and economic alignment. As soon as these issues are resolved one way or another, protectionism will have served its purpose and will be most likely lifted.
James R. Barth, the Lowder Eminent Scholar in Finance at Auburn University and a senior fellow at the Milken Institute. His research focuses on financial institutions and capital markets, both domestic and global, with special emphasis on regulatory issues
Sometimes countries may decide the best way to promote their own economic growth is to protect some of their industries from foreign competition. However, this can be a short-sighted approach that impedes longer-run growth. Moreover, differences in political agendas among countries can also adversely affect global free trade.
In general, less protection is better than more protection. It is well known that countries can benefit from trade in goods and services with one another. If one country protects its domestic industries from competition from firms in other countries, those countries may retaliate by doing the same. Clearly, if all countries protect their domestic industries, that will necessarily lead to less globalization than otherwise. This, in turn, will on average make people in countries everywhere less well-off.
The WTO has had problems in promoting greater free trade in goods and services throughout its member countries due to a lack of widespread agreement on how to proceed. As a result, there have been reductions in protectionism that have taken place by a sub-set of countries resulting from regional agreements rather than broader agreements among all the WTO member countries. The WTO, of course, tries to get countries to agree to limit protectionism that is harmful to its member countries.
Clearly, most economists tend to favor free trade rather than high barriers to trade among countries. To the extent that Russia takes protectionist actions this runs counter to what many believe is the correct way to improve relationships and beneficial economic activities for a wider group of countries. As a result, the image of an increasingly more protectionist country suffers. When one country protects its industries from those competing industries in other countries, it may simply lead to retaliation by those countries, which benefits none of the countries.
Yakov Mirkin, Head of the Department of International Capital Markets at the Russian Academy of Sciences’ Institute of World Economy and International Relations
Any [economic] crisis increases protectionism, economies start creating hurdles and supporting the “every man for himself” principle. As soon as the U.S. and the EU see steady economic growth and overcome the consequences of the 2008-2013 crisis, globalization will be immediately increased. The logic is one step backward during the crisis and two steps forward during the cyclic growth.
As for the WTO, it responds to the current challenges by curbing protectionism, so that it won’t go out control. Legal measures, created within the WTO framework, are the permanent barrier against the “flood” of protectionist measures that could have happened as a result of the crisis.
Yet the WTO is not well-adjusted to the quick response [to such meltdowns]. All its tools are delayed. They are bound to lag behind the practical measures of the authorities of the nations. And it is inevitable. In addition, such strong protectionist measure as devaluating a national currency is out of the WTO’s competence. That’s why it remains to wait for the natural decline of protectionism resulted from the crisis.
Of course, Russia as the largest developing country recently joining WTO and then creating a union with Kazakhstan and Belarus, looks more active and dynamic in its trade policy - like a bear who tries to adapt to living in the cage and adjust its policy to a new reality. When it settles down, its political activity will be weaker and Russia will integrate in the global trade landscape with more harmony.
We also should take into account that the Russian currency, the ruble, is overvalued by 30 to 40 percent and this puts Russia in an unfavorable position in the world arena. From this standpoint, Russia has one of the most unprotected markets in the world: When Russia takes protectionist measures unrelated to its currency, I see it as an unconscious response to the lack of protection created by a strong ruble.