Major trade powers using stealth protectionism: study

GENEVA Mon Oct 22, 2012 6:15pm EDT

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GENEVA (Reuters) - The world's biggest economies, especially the European Union and Japan are using protectionist policies that fly below the World Trade Organization's radar, according to a forthcoming study by two experts.

The study, by Vinod Aggarwal, professor of political science at Berkeley, and Simon Evenett, professor of international trade and economic development at the University of St. Gallen, examined seven major economies and 869 non-macroeconomic trade policies they have taken since the financial crisis began.

"During the period November 2008-May 2012 there was considerable resort to less transparent policy instruments (so called ‘murky protectionism') and to policy instruments that are not covered or are weakly covered by WTO rules," says the study, which will be published in the Oxford Review of Economic Policy.

At the start of the period under review, the world's largest economies vowed not to resort to protectionism at a G20 crisis summit in Washington.

If they have stuck to the letter of that promise, by and large, the study found they have not observed the spirit of it.

The authors surveyed Brazil, China, the European Union, South Korea, Japan, Russia and the United States, and found that they had not only tried to protect their economies against foreign competition but also often "picked winners" among their own firms, leaving the rest to bear the brunt of the crisis.

"Here's the bottom line for managers: don't count on WTO rules to protect your interests," the authors wrote in a blog published by the Harvard Business Review on Monday.

"Don't be misled by the avowed rejections of protectionism. Just because tariffs aren't being raised across the board, it doesn't mean firms' overseas commercial interests are being treated without prejudice."

WTO Director General Pascal Lamy said in June that there was "very broad confidence" in the WTO's dispute settlement system but also warned of an "alarming" rise in trade restrictions, now affecting 3 percent of global merchandise trade.

Aggarwal and Evenett said trade disputes had begun to crop up over crisis-era policies affecting auto parts, wind power, and solar panels, but said those formal disputes could represent the tip of the iceberg.

UNCONSTRAINED

The European Union and its 27 member states generated more than a third of the policies identified by the study, and 93 percent of them discriminated against foreign competition, a slightly higher proportion than in Japan and the United States.

European and Japanese discriminatory policies were also the most "selective", with more than two-thirds specifically targeting particular firms in the domestic market.

A tally of the 10 most affected sectors in each of the seven economies revealed that - in varying concentrations - all of them used policies that either discriminated against foreign competition or selectively favored domestic firms.

And the economies that resorted most to discrimination tended to rely most on policies where the WTO rules were weakest, such as bailouts, trade finance, and investment incentives - in 84 percent of cases in the EU.

Brazil, which was the least discriminatory and selective in its policies, generally regulated trade with measures that were subject to the toughest WTO scrutiny.

"Such a correlation casts doubt on some of the strong claims in the industrial policy literature that WTO rules impose substantial constraints on government intervention, at least during the crisis era," the authors wrote in the study.

(Reporting by Tom Miles; Editing by Jon Hemming)

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