However, WTO action against subsidies is not straightforward. To complain successfully, a country has to show that a subsidy meets several criteria. Then there is a pots-and-kettles problem: having subsidies of your own does not stop you from challenging someone else’s, but if you pick a fight they may have a go at yours. This uncertainty and ambiguity only adds to subsidies’ attraction. Governments can aid their carmakers and at the same time criticise others for their protectionist ways.
Protectionist urges are also being bolstered by countries’ seeming inability to co-ordinate their fiscal stimulus programmes. Some countries have been reluctant to work the budgetary pump for fear that their extra demand will leak abroad to the benefit of foreigners. To stop the seepage, some governments have inserted discriminatory conditions into their fiscal programmes, the prime example being the “Buy American” procurement rules. These were weakened after protests and threats of retaliation from abroad, but not before the prospects for global co-operation had been dented. Greater co-ordination of fiscal expansion would ease governments’ worries about leakage, because everyone else would be leaking too: all would gain from each other’s spending.
What should world leaders do to stop protection fraying the threads that tie the world economy together? The difficulty lies in devising something comprehensive and detailed enough to address the variety of protectionist measures that are being deployed in the crisis, and doing it quickly enough to maintain open trade.
Many argue that the most important thing for world leaders to do is to pledge a quick completion of the Doha round of trade talks, which stalled for the umpteenth time. By reducing tariff ceilings, this would place tighter limits on countries’ ability to increase tariffs. It would also ban export subsidies in agriculture, which are being used with greater vigour, especially as prices of farm goods fall. The EU, for example, has announced new export subsidies for butter, cheese and milk powder. Most important, completing Doha would be the clearest and most tangible evidence possible of a commitment to consolidating and building on the gains from more open trade secured in successive rounds since the second world war.
Some economists disagree. Aaditya Mattoo, of the World Bank, and Arvind Subramanian, of the Peterson Institute, argue that the Doha round is too ambitious given the state of the world economy, because it seeks to open markets for rich countries’ manufactured goods just when the politics are against it. At the same time, they point out that Doha would not restrict the use of some non-tariff measures causing most concern, such as the Buy American provisions or subsidies for failing industries. Messrs Mattoo and Subramanian suggest a new “crisis round” of world trade talks. In the first instance, WTO members could commit themselves to a standstill on all forms of protectionism.
Several other economists have also proposed a standstill. However, Messrs Mattoo and Subramanian suggest that in order to give governments a political reason to agree to this, they should also be allowed to postpone further liberalisation for the duration of the crisis. They would then embark on a new round instead of Doha, which would address the forms of protection that now look most pressing.
But the appetite for starting yet another series of talks is likely to be limited. Even if the crisis round’s agenda were more realistic than Doha’s (which isn’t obvious), there would be no guarantee that it could be concluded quickly enough to stop the bleeding in global trade.
Whatever they think about Doha or about the idea of a crisis round, most economists will agree that a simple promise to resist protectionism will not suffice. Some thing more specific is needed. A good start would be for governments, beginning with the leaders of the G20, to draw up a comprehensive list of protectionist measures that goes beyond tariffs and export subsidies. They could then agree to go no further with these than they have already.
Next, an agreement on co-ordinating fiscal policy would go a long way towards making such a standstill commitment credible, because it would alleviate worries about leakages abroad. Finally, empowering the WTO to name those who break the standstill would help to underpin it. The threat of embarrassment may make some countries think twice.
During the Depression, the volume of world trade shrank by a quarter. Nothing like that has been seen or forecast so far. Yet one lesson from the worldwide economic distress of three-quarters of a century ago is that once trade barriers come up, they take years of negotiation to dismantle. Preventing protectionism from getting worse is preferable to having to repair the damage afterwards. And even if a full-blown trade war can be ruled out, death by a thousand cuts cannot. The costs of myriad piecemeal measures could still add up to damaging protectionism. And when demand does eventually revive, if the world economy is supported by an open system of trade, it will recover all the faster.