Protect free trade system

Protect free trade system
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First Published: Tue, Dec 16 2008. 09 18 PM IST
Updated: Tue, Dec 16 2008. 09 18 PM IST
The last thing a fragile world economy needs now is a dose of protectionism. The chances of a retreat from an open global trading should not be underestimated when economic growth is dropping off a cliff and job losses are mounting. And India would do well to be part of the solution rather than be part of the problem.
Global trade is clearly in the doldrums. The World Bank says that it will decline in 2009, the first time this will happen after 1982. Many Asian countries—including India—have been reporting weak trade numbers. The famed and feared Chinese export engine is sputtering. A part of the story could be explained by falling commodity and other prices that reduce the value of exports and imports; but the scale of the declines in trade seems to suggest smaller volumes and a drop in overall economic activity. Freight rates are at multi-year lows, even though they have recovered a bit over the past week.
Protectionism can be dangerous at times such as these, as domestic lobbies force their respective governments to protect them against imports through higher tariffs and a cheaper currency. Each country may try to derive short-term advantages through such actions, but that will invite retaliatory moves to increase tariffs and devalue currencies in other nations as well. The world economy as a whole will get damaged further.
Closed borders will destroy growth and welfare in the long term, a painful lesson learnt during the global depression of the 1930s, when protectionism did almost irreparable damage to the world economy. The US Smoot-Harley Tariff Act of 1930 sought to protect American industry, but led to similar legislation in European countries. Trade shrank and the world economy worsened. Learning from this painful episode, the international economy after World War II has been based on low-tariff barriers and non-discriminatory access to markets. Even as there is deep disagreement among economists and policymakers about the value of free capital flows, there is broad consensus for free trade in goods and services.
The lessons of the 1930s are still important. An international commitment to open trade is the best way to prevent a repeat of similar policy myopia. The portents are not too good right now. The leaders of the G-20 had promised at the end of the November summit in Washington that they would come to an agreement before the year ends on how to revive the Doha Round of the World Trade Organization (WTO). But WTO director general Pascal Lamy said last week that he would not convene a meeting of trade ministers this year since the chances of an agreement on how to go ahead are remote.
“The G-20’s key role in this crisis has been to bolster confidence globally; to reassure the private sector that governments can get their arms around this crisis and keep it from spiralling out of control. In this light, the Doha failure could not come at a worse time,” write Richard Baldwin and Simon J. Evenett at VoxEU, a website that publishes economics research. “Private sector confidence is at its nadir, investment and consumption plans are being postponed, and international trade is tumbling at an alarming rate. The Doha Round is not dead, and it is possible that progress can be made with the new US administration after India’s election takes some pressure off the Indian government…”
Baldwin and Evenett are correct in their assessment that India will have an important role to play in helping to keep the world trade system functioning. Commerce minister Kamal Nath has used the Doha Round to grandstand. Not all the issues he raises are mistaken; but one cannot help feeling that the broader goal is to score points rather than help clear obstacles to a trade deal. The Free Exchange blog published by The Economist weekly says the world is now caught in “Nath Equilibrium”, calling the commerce minister a “one-man roadblock”.
A trade deal to prevent a slide into protectionism will impose short-term costs on all the major players, including India. It will require maturity to stand up to immediate pressures and not fall into the trap of competitive devaluations, subsidies to exporters, higher tariff and non-tariff barriers. Not that this will be easy. Even the US tends to rush into protecting its failing industries from imports every now and then. So there are no permanent heroes and villains here. And that is precisely why the rules-based trade regime that has served the world so well since 1947 should be protected and respected.
Prime Minister Manmohan Singh seems to have taken personal charge of economic policy. He is also the country’s finance minister. The Reserve Bank of India is working in close coordination with the Union government (which is not necessarily a happy state of affairs). He would do well to ensure that his government is less of a game spoiler during international trade talks as well.
Your comments are welcome at cafeeconomics@livemint.com
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First Published: Tue, Dec 16 2008. 09 18 PM IST