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Coping with rising protectionism in developed countries

| Updated: June 20, 2019 21:11:15

Coping with rising protectionism in developed countries

In a period when global economy is already suffering from post-recession inertia and failing to pick up strong pace of recovery, surge of protectionist trade policies has emerged as a new obstacle in the path of promoting inclusive growth through international trade. While a number of cyclical components such as weak prices of energy or metal items and several structural factors like consolidation of global value chains have contributed to the persistence of global trade slowdown, protectionist trade interventions by advanced economies have also played their part in the process. In fact, the arrival of economic protectionism in the worst performing decade for trade growths has cornered any efforts of international commerce liberalisation.

To understand what fuelled the current spectre of global protectionism, which has become evident with implementation of "economic nationalism" in some western democracies, it is important to understand how global trade has affected other economic ingredients across the globe. There is a clear consensus among economists about trade liberalisation improving wealth and income, and free trade benefiting a country as a whole. It is equally true that both protectionism and system of free trade create winners and losers. While protectionism ends up handpicking winners amongst industries and jobs which are more influential to governments, free trade picks its winners based on competition. Jobs and industries that are less competitive cede to more competitive foreign entities. But far more importantly for any country, freer trade means cut in consumer prices, increased wealth, higher productivity and higher efficiency in allocation of resources. Setbacks of less competitive or uncompetitive businesses in a country gradually open up investment and expansion opportunities to more competitive industries of the same country. This mostly translates into concentrating efforts on items in which the country has a comparative advantage. For Bangladesh, a shift towards liberalisation during 1980's and 1990's from heavily protectionist regime resulted in a boom in the competitive readymade garments (RMG) sector as it overtook jute as the prominent export item.

Inevitably, free trade does leave some people behind. And betterment of these people requires supportive measures from governments. In case of some western democracies, progressive trade liberalisation displaced significant amount of manufacturing job overseas, to more competitive workers of emerging economies. If a substantial number of losers from global trade is left to the hands of markets without adequate government interventions, they are more likely to remain unemployed or underemployed, and become increasingly reliant on social protection. Without investing in workers, developing human capital and enhancing productivity of workers, the gains from free-trade give asymmetric rise to wealth inequality. And when this inequality is translated into socio-political system, it creates faction and aversion against global trade. For example, according to the estimates of Economic Policy Institute of United States, the North American Free Trade Agreement has resulted in 682,000 jobs to be lost or displaced from USA.

Such results may create mass-disapproval about free-trade agreements. And the constituencies with highest job displacement become increasingly sceptical about future trade agreements. In addition to that, several political-economic factors, such as role of ultra-rich private financial institutions in global economic meltdown of 2008, use of scarce public funds in commercial bailouts and slow pace of economic recovery have resulted in groups of disaffected population worldwide. High income-inequality and stagnant real wages in many advanced democracies added fuel to the fire. And the refugee crisis across the globe exacerbated this situation with rise of anti-immigration political narratives. Under these circumstances, populist political ideologies that identify globalisation and free trade as threatening component for national economic integrity received public appreciation. And the dismal state of affairs has accentuated when anti-globalist agendas resulted in political upheavals in elections of Europe and the USA.

The globalisation backlash resulting from global financial crisis has also fuelled a rise in protectionism, with different countries implementing various trade-restrictive measures. Most protectionist measures in the existing global system have been proliferated and persisted since the crisis. During that period, both advanced and developing economies started applying protectionist options to safeguard their economy from global fluctuations. The World Trade Organisation (WTO) estimates, a total of 1,583 trade restrictive measures have been imposed by G20 countries since November 2008, and only a quarter of these measures have been removed. These restrictions have had a detrimental impact on trade flows, particularly for the world's poorest countries. According to another estimate (Evenett & Fritz, 2015), least developed countries (LDCs) have incurred a loss of $264 billion in exports as a result of these protectionist measures. In other words, the value of LDC exports could have been 31 per cent higher if post-crisis protectionism had been avoided.

Like other LDCs, Bangladesh has also been affected by these protectionist measures. According to the global trade alert (2019), there are 57 protectionist interventions that harm Bangladeshi export initiatives. On the contrary, Bangladesh experienced only 29 interventions since the crisis from foreign governments which were liberalising in nature or promoted trade. In more recent times, two largest economies of the world got embroiled in retaliatory trade disputes, starting with USA imposing a series of high tariff on Chinese imports. But Pew Research Centre (2018) pointed out, Bangladesh pays highest amount of tariff on total import value in the US market (Figure 5). This is because, Bangladesh does not receive any generalised system of preference in US market, and the Most favoured nations (MFN) tariffs set by US authorities for the most prominent Bangladeshi export (RMG) is high.

As the global economy goes through a difficult time, there is a significant possibility that the increasingly anti-trade political rhetoric could spin out of control, with damaging consequences for the international community. The European Central Bank (ECB) assumes that global trade will grow at slower rate in 2019 than previous year and rise of protectionist trade regimes is a primary contributing factor behind that situation. Consequently, the Asian Development Bank (ADB) has also issued warnings about slower continental growth over the next two years due to softer demands and persistent trade tensions (2019). Nonetheless, the future prospects are not necessarily bleak for Bangladesh. Small-scale trade disputes between advanced and major developing economies may divert investments to alternative sources of emerging markets. Such trade spats between big economies create short or medium-term demand for suppliers who are competitive enough to deliver under difficult circumstances. If local exporters are keen and competitive enough to attract some of those attentions, it may end up giving Bangladesh an additional boost to exports during the LDC transition, while some preferential market access are still available. However, in case of a full-scale global trade war, all countries, including Bangladesh, may end up losing valuable share of exports and face further trade slowdown.

Despite progress, Bangladesh itself continues to impose high trade protection. An important policy question is whether trade protection helped gross domestic product (GDP) growth.  On the surface it would appear that high GDP growth co-existed with high trade protection.  Indeed, as shown in Figure 6, impressive economic growth has been accompanied by a much higher level of tariff protection than all other successful developing countries including China, India, Indonesia, Malaysia, the Philippines and Vietnam. During the period 2010-17, except for just one (Chad), there was no country that had applied tariff rate higher than Bangladesh (approximately 12 per cent) and achieved average growth rate higher than Bangladesh. However, this simple correlation is misleading. The two major drivers of growth have been the ready-made garments (RMG) exports revolution and the surge in foreign remittances, both of which were associated with an open trade and factor market regime. Indeed, there is evidence that trade protection-based manufacturing performed worse than export-oriented manufacturing.  Similarly, job creation was better in export-oriented RMG than trade-protected domestic industries. Furthermore, as will be explored in detail in latter parts of this series, large trade protection has created a major anti-export bias that has hurt export diversification and export growth.  

In addition to the need to lower trade protection to promote export diversification, with LDC graduation on the cards, trade liberalisation will become an issue of concern. Bangladesh will have to trim down certain protectionist measures to remain consistent with core WTO trade agreements. This will be a test of prudence of policymakers and adaptiveness of domestic industries. However, in a world where protectionism is rising, Bangladesh cannot singlehandedly cut own tariff rates and open the market for other parties. This calls for strong trade negotiations and engaging in meaningful regional or bilateral trade agreements. Discussions in the following sections will shed light on these issues. 

Dr. Shamsul Alam is Member (Senior Secretary), General Economics Division, Bangladesh Planning Commission.


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