Standing Firm Against Protectionism

Consulting Fellow, RIETI

Concern over growing protectionism

Eight months have passed since the Great East Japan Earthquake on March 11. With support for reconstruction coming from numerous quarters, various reconstruction measures are being carried out in the afflicted areas. Under these circumstances, it is important that both Japan and its trading partners keep their markets open to promote trade for better allocation of resources and consumer benefits. Meanwhile, protectionism, e.g. creation of new trade barriers, would hold down or reduce the scale of export markets and hamper consumer benefits. Thus, the spreading of protectionism must be avoided at all costs.

Concern over protectionism has arisen often in the past during times of world economic uncertainty (e.g. during the inter-war period). Most recently, concern over protectionism arose in and after the second half of 2008, when the global financial crisis worsened rapidly. In response to this, since 2009, the World Trade Organization (WTO) has launched an exercise to grasp and analyze the current situation of trade-related policies and systems (monitoring), focusing on WTO members, as part of its effort to review the world's trading environment. With regard to Japan's trade-related policies and systems, the chair's concluding remarks for the WTO Trade Policy Review (TPR) of Japan conducted this February stated that Japan did not adopt any new protectionist trade measures during the review period. The subsequent monitoring reports suggest that Japan appears to have not adopted protectionist measures.

Meanwhile, looking at trends in the trade policies adopted by various countries/economies in response to the global financial crisis, no apparent tendency toward increased protectionism was observed until 2010 as was initially feared. However, according to a June 2011 report, various protectionist measures have been noticeably adopted, including export controls, technical barriers of trade (TBT), sanitary and phytosanitary (SPS) measures, and delayed customs procedures. Furthermore, the WTO Report on G-20 Trade Measures released in October expresses concern that protectionism against external trade has increased in various countries/economies to deal with their domestic economic problems. It is also worrying that there is an increasing number of cases in which actual trading barriers appear to have been raised with various protectionist movements.

Multilateral trade liberalization, expansion of regional integration, and unilateral liberalization

To ensure the future recovery and sustainable development of the world economy, creating a more open global trade system is desired. Turning our eyes to major recent trends surrounding global trade policies, there is a distinct increase in the number of preferential trade agreements (PTAs) concluded. In Japan, it would appear that discussions are being held on the Japan-EU Agreement and the Trans-Pacific Partnership (TPP) Agreement. At the same time, we note that the WTO and its predecessor General Agreement on Tariffs and Trade (GATT) were established with the aim of forming a multilateral trading system that encompasses countries and economies beyond any particular region or "bloc economy," reflecting their proliferation and negative effects before World War II. It is also a fact that the world economy has grown with the progress of trade liberalization on a global scale. Thus, although regional integration is expanding, promoting multilateral trade liberalization involving as many countries as possible is optimal from a global perspective. This is an idea supported by many WTO members at the WTO Trade Policy Review meetings.

Meanwhile, trade liberalization is a policy or choice that can be adopted by the unilateral decision of one country/economy. However, one of the reasons why voluntary trade liberalization has made little progress in the real world is perhaps due to the income distribution problem, i.e., it is inevitable that trade liberalization would benefit some sectors and harm others. Nevertheless, standard trade theory suggests that international trade would benefit the interests of the people of the country as a whole (consumer surplus), even if costs for the proper transfer of income to the sectors on which liberalization would have negative impact are deducted. It would be worth considering what sorts of measure could be taken when trade is liberalized from the perspective of income distribution.

Importance of quantitative analyses

A helpful method of considering the kinds of effects to be expected when implementing various trade policies is to conduct quantitative assessments based on simulation (estimates), including cost-benefit analysis. While results of estimates may vary according to such factors as how premises are made and how models and values are used, when considering a certain sector as to whether market liberalization should be promoted or market barriers maintained, it would be helpful to examine the estimates published by the public sector from various angles and have discussions based on data and quantitative analyses. The possible specific influence of trade liberalization on various sectors of the economy can be imagined in a more solid manner than just having qualitative discussions.

Meanwhile, the WTO Secretariat's report for the Trade Policy Review of Japan in 2011 states that "cost-benefit analysis is not frequently used when formulating, revising, or abolishing policies and measures." The report points out that "such analysis is rarely used to evaluate existing measures, such as tariff and non-tariff protection of agriculture, or to evaluate the economic effects of preferential trade agreements." At the same time, it notes that the recent publication of quantitative analysis regarding the possible economic effects of Japan's participating in the Trans-Pacific Partnership (TPP) initiative is one of the few notable exceptions. It considers that publication of such quantitative analysis by the government can help it adopt trade and related policies and measures that are more cost-effective. Similarly, when building a consensus among various parties on trade policies, publishing estimates from various angles to induce quantitative discussions on them is desired. Furthermore, the possible specific influence on various sectors of the Japanese economy can be more easily imagined and assessed than having only qualitative discussions.

Whatever the case, trade liberalization should not be halted. In order to resist protectionism, it is hoped that progress will be made in necessary structural reforms in various countries, that each country will stand against protectionism through liberalization commitments incorporated into the WTO Agreements and by improving transparency, that discussions will be deepened toward a direction that is beneficial for many countries and regions through multilateral trade negotiations and other talks, and that trade liberalization will move ahead.

November 22, 2011

November 22, 2011

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