This ugly picture is hidden by the rosy rhetoric of free trade

PUBLISHED : Sunday, 22 May, 2016, 1:42pm
UPDATED : Sunday, 22 May, 2016, 9:54pm

For much of the past month, top Asia-Pacific Economic Cooperation (Apec) officials have been up in Arequipa, in the south of Peru close to the high Atacama desert, haggling on pathways to a Free Trade Area of the Asia-Pacific. The region’s trade ministers have made firm and impressive commitments to trade liberalisation. But sadly, behind the high-sounding rhetoric, lies a different reality: trade stagnation, emerging global scepticism about the virtues of globalisation, and creeping protectionism.

For three decades, trade has been a primary driver of world economic growth. As a trade-focused journalist since the Uruguay Round of trade liberalisation in the late 1980s, my conviction has always been clear that free trade benefits us all, and that the globalisation of businesses brings efficiencies, creates jobs, and has helped to lift the previously excluded developing economies out of poverty.

But from 2011, that has no longer been so. Trade has stagnated since 2011, and actually fallen since 2014. From trade growth averaging 16 per cent a year between 2003 and 2008, it has slowed to annual growth of just 1.5 per cent since 2010. Confidence in the benefits of free trade has been rocked as politicians across the world have wrestled with the awful consequences of the 2008 crash, and the recession that has followed. And putting to one side the bigoted and ill-informed rhetoric of aspiring leaders like Donald Trump, sympathy for protection against foreigners’ “unfair” trade practices has begun to take root.

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In many respects, such backsliding is hardly surprising. As recession has slowed economic activity and cut jobs, and as the contraction of export-oriented manufacturing in economies like China has cut demand for commodities and hit commodity prices, so pressures on politicians to blame pesky outsiders are hard to resist. In Peru last week, in the middle of hard-fought presidential elections, I was actually surprised and relieved to feel almost no foreign scapegoating – despite a 13.4 per cent fall in exports over the past year, and an 8 per cent fall in per capita GDP. Other countries have reacted to recession less even-handedly – whether it is Trump railing against the North American Free Trade Agreement (Nafta), or European politicians attacking China for “dumping” steel.

For most governments, well tested in managing doublespeak and hypocracy, the rhetoric in general remains positive on free trade. The 12 Pacific economies that recently agreed the Trans-Pacific Partnership are still actively advocating ratification. In Geneva, 24 economies led by the US and the European Union are still working hard on agreeing a Trade in Services Agreement (TiSA).

The World Trade Organisation continues to gather signatures ratifying the Trade Facilitation Agreement forged last year (though still only 30 per cent of members have yet ratified). In the Association of Southeast Asian Nations (Asean), negotiation continues on a Regional Comprehensive Economic Partnership trade deal, which embraces India among others. In Latin America, the four-member Pacific Alliance is pressing ahead with cutting trade barriers between them. And of course Apec continues to lay the foundations for the ambitious Free Trade Area of the Asia Pacific (FTAAP), which, if ever, completed would form the world’s largest free trade area.

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But behind this lofty aspiration, a surge of what Simon Evenett at the University of St Gallen, calls “murky protectionism” has begun to take hold. According to his highly regarded Global Trade Alert which tracks new protectionist measures, we saw over 500 such measures worldwide in 2015, up from 350 in 2008. He says these measures affect 5 per cent of global trade, and are costing us US$423 billion a year in lost GDP, and about 9 million jobs.

He says “easily spotted” tariff increases have fallen by 21 per cent , but easier to hide measures like subsidies are up by more than 40 per cent . These “murky measures” range from anti-dumping actions, countervailing duties and safeguards against import surges, to import and export restrictions, to restrictions like domestic content requirements, and to subsidies or supports to flagging local sectors. He notes increasing use of regulations to keep foreign products out, ranging from health and safety rules to green economy rules.

His report “rejects the benign interpretation that the global trade slowdown is merely a combination of a rising US dollar, falling commodity prices, and the retrenchment of supply chains involving China.”

These are clearly significant, but he argues that the covert emergence of new protectionism is a source of rising concern. Confirming his views, the World Trade Organisation (WTO) sees trade restrictive protectionist measures affecting 4.6 per cent of world merchandise imports, with a value of around US$852 billion.

Evenett reports a cumulative total of over 5,000 trade-blocking measures enacted since October 2008, falling into the four broad areas of trade “defence” measures like anti-dumping and safeguards against import surges; bailouts and subsidies like Obama’s “cash for clunkers” initiative to resuscitate the US car industry after the 2008 crash; tariff increases; and a grab bag of “localisation” initiatives, including procurement localisation and controversial efforts to enforce “data localisation”.

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Most such initiatives are taken in response to local political lobbying pressures, in theory to help the local economy, but all economic analyses suggest the opposite: that net harm from such measures far outweighs the gains from appeasing powerful local lobby groups.

The B20, the business arm of the G20, has calculated that reversing these 5,000 measures would boost global exports by at least US$460 billion. Independently, JP Morgan has calculated that these measures in the US are costing 50,000 jobs a month in export sectors.

As one observes the crass economic illiteracy of political campaigns now being engaged in the US and in large parts of Europe – including the UK in the midst of its debate on whether or not to stay in the European Union – it is clear that few seem to care whether this “murky protectionism” is costing jobs and hurting the economy. The protracted global recession is causing stress and anger, and people feel a need to blame others. Trade and foreign exporters are convenient targets, and the longer the recession lasts, perhaps the worse this anti-trade sentiment will get. Who knows how much harm will be inflicted before rationality returns.

David Dodwell is executive director of the Hong Kong-APEC Trade Policy Group

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