March 6, 2009

Pascal Lamy, the director-general of the World Trade Organization, has been sounding the alarm bells as he warns that political leaders around the world should refrain from responding to the global finance crisis by enacting protectionist measures that will only cause trade flows to shrink even further. On Jan. 26, Mr. Lamy circulated to the WTO’s 153 member countries a confidential 114-page report that documented unsettling ongoing efforts by various countries to close their borders to imports. While the Europeans (with new farm subsidies for cheese and dairy products) and Americans (with various “Buy American” provisions in the $787 billion economic-stimulus package) were the focus of much of the criticism, the report also singled out such Asian protectionist offenders as India, Indonesia and South Korea. On Jan. 28 in Davos, Switzerland, Mr. Lamy buttonholed Asian leaders, including Chinese Premier Wen Jiabao, on the sidelines of the World Economic Forum. Late last month, the WTO leader flew to Asia, where he issued even more public warnings. And later this month, Mr. Lamy is planning to send another “restricted” report to WTO members, which is expected to provide further documentations of the spreading global economic nationalism.

Every important leader Mr. Lamy has spoken with has—oh-so-sincerely—agreed that the dangers of protectionism are very real. “Experience shows that in crisis it is all the more important to stick to a policy of opening up and co-operation,” Premier Wen declared in Davos on Jan. 29, one day after he huddled with Mr. Lamy. That same day at the World Economic Forum meetings, India’s trade minister, Kamal Nath, warned against “the sounds of protectionism.” It is important to “recognize that at the heart of globalization lies global competitiveness, and if governments are going to protect their noncompetitive production facilities it’s not going to be fair trade,” Mr. Nath observed. Across the region, all the top political leaders have been singing from the same free-trade song sheet. But do they mean it?

Mr. Lamy’s Jan. 26 confidential report noted that “India raised tariffs on some steel products and issued notifications restricting imports of some steel products in November 2008.” And in South Korea the WTO report observed that tariffs will triple on crude-oil imports, to 3% from 1%. Meanwhile Indonesia has issued orders specifying that “only five ports and certain international airports are to serve as entry points for certain imports, such as electronics, garments, toys, footwear, and food and beverages,” Mr. Lamy’s confidential report observed.

Asian officials, like their counterparts in Europe and the United States, all seem to think that protectionism is an evil economic practice that the other guys give in to. When India recently slapped on import curbs to keep Chinese-made toys out of the hands of Indian children, Trade Minister Nath earnestly explained that the “public interest” was at stake, and expressed pain at the suggestion that India would resort to “protectionism.” As for India’s raising tariffs on steel—competition from China is the main target—Mr. Nath claimed that China deserved the increased duties because the Middle Kingdom isn’t a real market economy. Meanwhile, while the Chinese have vigorously protested India’s protectionism, they have also been busy with new subsidies and trade barriers to protect Chinese exporters, including domestic steel producers. The Indonesians are also making moves to protect their domestic steel companies, complaining that Indonesian consumers prefer foreign steel because it is made from more advanced technology and is cheaper. Such assertions might be laughable in respected economic circles, but the top trade officials are skilled in uttering them with straight faces.

Top honors for his remarkable ability to advance a ridiculous argument should go to South Korean Agriculture Minister Chang Tae-pyong, who met with Mr. Lamy in Seoul last month. South Korea would like to be helpful in the Doha Round’s tariff- and subsidy-cutting agenda, Mr. Chang averred. But the Korean trade official added that he hoped everyone would also agree that because his country’s small rice farmers were not competitive in global markets, Korea ought to be given special exemptions on slashing tariffs on the grounds that it is an agricultural “developing nation.”

One has to marvel at the logic, if not the audacity. South Korea, with an annual per capita GDP of about $27,000 (compared to $1,500 for Bangladesh) is asking the WTO to pretend that Korea is basically a basket case. Mr. Lamy’s retort to this is not a matter of public record, but presumably the WTO head is aware that Korea is a member of the Organization for Economic Co-Operation and Development, along with other rich countries like France, Germany and the United States.

But then Japan is also asking that its uncompetitive rice farmers be treated as poor-country peasants in the Doha negotiations. In Tokyo, the definition of a free trader is anyone who would dare to be brave enough to suggest that the proper level for Japanese tariffs on imported rice should be “only” 400% and not twice that.

Another thing that Japan and Korea, along with many others, agree upon is that the “Buy American” provisions that are in U.S. President Barack Obama’s stimulus package are outrageous protectionism. Again, the hypocrisy-meter should be hitting the high decibels at this point. If Washington’s autarkic practices are deplorable, what about their Japanese and Korean copycats? Both Asian nations have also carved out special exemptions in the WTO to restrict foreigners from their governments’ major construction projects—big-ticket items including water, electricity, airports and urban transport. There is also a threshold of $22 million below which the Japanese and Koreans have the right to bar foreigners from contracts altogether. Meanwhile, other countries such as China that are now busy issuing press releases blasting the Buy American laws haven’t even been willing to sign on to the WTO’s government-procurement agreement at all—ensuring that in their own construction projects, it’s quite often a “Buy Chinese” business where foreigners are not welcome.

If there is any country where officials should recognize the vital importance of their assuming leadership by their own sound economic example, that would be the U.S., which is still the strongest economy in the world. But in Washington, the current wave of economic nationalism threatens to become a tsunami. From a free-trade perspective, the atmosphere in Rep. Nancy Pelosi’s House of Representatives is positively poisonous. Consider one “economic idea” that the venerable Rep. Charles Rangel, who chairs the powerful Ways and Means Committee with jurisdiction over trade and taxes, has come up with. Mr. Rangel is pushing a bill called the Trade Enforcement Act of 2009. “America’s trading partners don’t always live up to the commitments they make in trade agreements with the United States—and the Bush administration too often failed to insist that they do,” Mr. Rangel explained when he introduced the legislation. The measure would create an Office of Congressional Trade Enforcer, which would “investigate barriers to U.S. exports, develop complaints against foreign countries,” and pressure the Office of the U.S. Trade Representative (an arm of the White House) “to file cases” against the foreign cheaters—singling out China as a high priority for the suspicious U.S. congressional sleuths.

And while on the subject of American-style protectionism that makes no economic sense, consider the political position that the new occupant of the White House has put himself in. During last year’s presidential campaign, Barack Obama took out a radio advertisement in Milwaukee, Wisconsin, home of the iconic Harley-Davidson motorcycles, in which the Democratic candidate ridiculed Republican rival John McCain for refusing to say that there ought to be Buy American laws for motorcycles. Sounds good, especially to economically illiterate American voters. But how far would President Obama get if he hopped on one of those famous Fat Boys that didn’t have its Japanese-sourced carburetor in it? Or the tires, brakes, wheels, or the electronics that Harley-Davidson buys at the best prices and highest qualities it can find, whether domestic or foreign? Not to mention that Harley-Davidson makes significant profits from selling its Hogs around the world. Harley executives declined to be interviewed for their feelings on what would happen to their company if, say, the Chinese and Japanese refused to buy American motorcycles, in a tit-for-tat response to a Buy American favor for Harley. But they surely understand that Mr. Obama’s helpful economic advice would be ruinous.

When such absurdities are (painfully) pointed out to them, most trade officials, whether they are in Washington, New Delhi or Jakarta, say that their current protectionist moves are politically necessary and designed to do only “temporary” limited economic harm to global trade flows. The bad old days of 1930s-style rampant global protectionism, they contend, will never come back. But even if that turns out to be true, what’s going on now is very dangerous. In his January report to WTO members, Mr. Lamy cited a recent study that pointed to what would happen if all countries increased their applied tariffs to their highest legally permitted rates. If that happened, the report observed, “the average global rate of duty would double and the value of global trade would be cut by about 8%” That ought to frighten everyone.

Greg Rushford is editor of the Rushford Report, an online journal that tracks trade politics and diplomacy.