G20: Do what we say, not what we do

The G20 finance ministers may have yet again reaffirmed their opposition to protectionism, but there's plenty of it around, warns Sean O'Grady

March 17, 2009

Having packed their bags and left Horsham, the finance ministers of the G20 – and indeed their political chiefs planning to meet for the main summit at Downing Street on 2 April – might want to plan a trip to Quito, capital of Ecuador, where they can witness a remarkable protectionist experiment at first hand.

Though the country's economy ranks only 67th in the world (Brazil, Mexico and Argentina represent the Latin interest at G20 gatherings), Ecuador leads the world in production of tariffs and quotas. The slogan "Ecuador First" has appeared everywhere, and Ecuador's new trade barriers cover 627 different goods – affecting everything from Peruvian shampoo to Chilean grapes and US-made trainers.

The policy may be populist, but it hasn't done the population much good. It has hurt Ecuador's neighbours and made Ecuadoreans themselves poorer: it has not protected Ecuador from the world recession.

No other nation may have reacted to the economic crisis with such naked defiance as Ecuador – but she is hardly alone. Researchers at the World Bank say that, since the last G20 leaders' summit in Washington, several countries, including 17 of the G20, have implemented 47 major measures whose effect is "to restrict trade at the expense of other countries". Of the G20 group, only Japan, Saudi Arabia and South Africa were given a clean bill of heath.

More broadly, World Bank officials have identified 78 often inventive actions in restraint of trade. They include: Russia's increased tariffs on used cars; the European Union reintroducing export subsidies for butter, cheese and milk powder; Argentina's imposition of non-automatic licensing requirements on auto parts, textiles, TVs, toys, shoes, and leather goods; Indonesia's requirement that five categories of goods (including clothes, footwear, toys, electronics, food and drink) would be permitted through only five ports and airports.

In some countries, tightening standards have slowed import entry. For example, India has banned Chinese toys for six months, and China has banned imports of Irish pork and rejected some Belgian chocolate, Italian brandy, British sauces, Dutch eggs and Spanish dairy products.

China has also slapped a 5 per cent tariff on some iron and steel products, irked by the "Buy American" clause in President Obama's $787bn (£560bn) stimulus package, and America's 1979 Trade Act, both of which favour the US steel industry.

The World Bank talks about "incipient but worrisome trends", though it concludes that, for now, the global collapse in demand and shrinking trade finance has had a more significant effect than new tariffs and quotas. The IMF says world trade will decline by 5 per cent this year – the first decline since 1982 and the largest reduction since the Second World War.

But protectionism isn't helping, and it is in the auto industry that the protectionist urge is at its most virulent. Even the most apparently virtuous members of the G20 seem to have difficulty in resisting. For example, the German Chancellor Angela Merkel has long been an outspoken critic of the protectionist tendencies in the US Congress – yet last week even she was offering a carefully calibrated offer of state aid to her native motor industry, and, in particular, General Motors' Opel division, based in Russelsheim. "If we think about Opel, the conditions on the links with General Motors and others are so complicated that we have a political responsibility to be helpful on a possible separation, for example, of General Motors and Opel or partial independence."

Vauxhall, the British arm of GM, has indicated that it is confident of £350m of UK government aid, and the Swedish and Spanish governments stand ready to stand by the GM operations in their countries.

There could be few more potent symbols of the dangers of deglobalisation than this fracturing of a business that has taken GM some 80 years to integrate – nor of the weakness of national political will in the face of "strategic interests". That is, after all, what lay behind the British Government's recent offer of a total of £2.3bn in aid to the auto industry, and a £27m special grant to Land Rover to pursue "green" technology.

Still, as ever, these nations' governments cannot compete internationally with that cradle of chauvinism – economic and otherwise – France. The recent €6bn (£5.5bn) rescue of Renault and PSA Peugeot Citroë*came with remarks from President Sarkozy that it was "not justified" for a French carmaker to build a factory in the Czech Republic – a fellow EU member – to sell cars in France. The Single Market has never been in such danger.

It all seems an age away from the sprit of the declaration by the G20 summit in Washington last November. "Within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation [WTO] inconsistent measures ."

Despite the urgings of South Korea and others in east Asia, the G20 finance ministers published an ominously less concrete formulation in their Communiqué, merely saying: "We commit to fight all forms of protectionism and maintain open trade and investment."

The G20 has also ducked the issue raised often by Gordon Brown – financial protectionism (though the UK, like others, is tacitly pushing its banks to put domestic customers first in return for billions in state aid).

The best that can be hoped for from the Downing Street summit next month, perhaps, is a renewal of November's pledge not to increase the level of protectionism prevailing in the world today – and perhaps persuade the US to conclude its knife-edge bilateral trade treaties with nations such as South Korea and Colombia. All concerned will commit once again to carry on with the Doha talks, though these seem further away from consummation than ever. The WTO has promised a "name and shame" paper cataloguing crimes against free trade by G20 members.

Still, the slump in world trade already in train will itself hasten the next wave of financial crises. These seem certain to happen in two regions. In east Asian economies, such as Thailand, which earns as much as 65 per cent of its GDP from exports (compared to say 30 per cent for Germany), the vulnerability to trade slowing is obvious.

On the other side of the world the drying up of financial flows will send nations such as Romania towards bankruptcy – hitting the Western banks invested there, with unknowable repercussions. Both will stress the IMF to the limit. "In the end," Gordon Brown is fond of saying, "protectionism protects no one." True, but it does seem to be a vice that few can protect themselves from.