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Protecting World Trade

August 12, 2009

“The bottoming-out of trade reflects a slowing of the decline in the world economy,” according to a recent article in The Economist. “Destocking may have run its course. Given its responsiveness to output, a lively rebound in trade is not inconceivable. Meanwhile, protectionism has not run riot.”

The article contains some useful data and makes a number of important observations. For example, it points to the relative resilience of trade in services  – an area where destocking is not an option. In the year to April, the US cut imports of goods by 34% and exports by 27%, but the figure for services was only 10%.

As the recession started to bite, one fear was that national protectionism would grow. While there have been some moves in that direction (the US and the EU have both increased farm subsidies; several countries have raised tariffs), in general protectionist behavior has been relatively mild.  The World Trade Organization has monitored a sharp increase in the number of anti-dumping cases and potential for litigation in other fields appears to be growing.  For instance, the US is making increased noise about violations of labor standards as a source of unfair competition. Such litigation could constrain progress on the Doha trade talks, which otherwise show signs of revival.

In the view of the World Bank, “Countries realize that open markets cannot be taken for granted and few of them want to be seen to fall foul of their international commitments”.  However, there are still threats around the corner. Recession has been eased by the collective action of several major economies to expand fiscal and monetary policy. This injection through borrowing cannot last – and when it reduces, cuts in spending and employment are bound to follow.  At that point, trade barriers may once again prove tempting and become an issue for politicians facing local discontent.

One feature of such protection is of course through ‘buy local’ provisions and to date, such principles have already been attached to the trade stimulus packages in the US and China. These are obviously of greatest effect in areas of public procurement, where cuts in spending are inevitable. In the face of such cuts, reduced competition should of course be the last reaction, because that guarantees reduced services.

Other protections to date have come in the form of sectoral subsidies, of which the most glaring have been in the banking and automotive sectors. In automotive especially, there are some signs of a temptation to protect local jobs at the expense of international production or suppliers.

The overall volume of trade is of course fundamental to the security of those in the world of contracts and procurement. And freedom to establish the most rewarding trading partnerships is key to the competitiveness of our organizations. Therefore we must hope that recovery will occur soon and that it will not be accompanied by protective measures that undercut competition.

Meantime, we should be undertaking a thorough review of our own trading policies and practices, as reflected in our contracting standards and capabilities, to ensure that we are an attractive and efficient trading partner.  When the upturn comes, we should be aiming to be the best.

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