WASHINGTON—Protectionist measures increased during the recent global financial and economic crisis, but had little effect on world trade. In contrast to the 1930s, stimulus measures, financial rescues, stronger lender-of-last-resort options, social safety nets, and the World Trade Organization’s mechanisms for resolving disputes helped to stave off many protectionist tendencies.
In a new paper, Uri Dadush, Shimelse Ali, and Rachel Esplin Odell explore the complex and mutually reinforcing set of legal and structural changes in the world economy that make a return to protectionism more costly. They stress that increased reliance on trade and the globalization of production has increased the vested interest in open markets. By taking the following six steps, policy makers can help foster a liberal trading environment, strengthen resistance to protectionism, and prevent its return.
- Adopt good macroeconomic and social policies. Assuring an open and predictable trade regime requires sound macroeconomic policies, financial regulation, and social safety nets that limit the impact of economic downturns.
- View protectionism as costly and risky. In an interconnected world, protectionist policies are more expensive than in the past and their effects are more difficult to predict, making protectionism an increasingly dangerous policy tool.
- Mobilize domestic forces systematically. Given the centrality of autonomous trade disciplines, domestic forces opposing protectionism should work together to ensure that trade protection proposals are examined transparently and by broad constituencies.
- Exploit all mechanisms to promote change. Instead of focusing exclusively on multilateral approaches to trade liberalization, a more realistic approach would also include plurilateral, bilateral, and regional processes.
- Pay more attention to trade facilitation. Reducing transaction costs by standardizing customs formalities, increasing port efficiency, and improving the regulatory environment helps consolidate the vested interest in and support for trade.
- WTO must facilitate processes. The WTO must help foster reforms consistent with the five steps described above to maximize its impact and remain relevant, rather than operate exclusively as a forum for the exchange of multilateral concessions.
“Although markets are more open and protectionism is now better contained than in the past, protectionism is far from extinct,” the authors warn.
Uri Dadush is senior associate and director in Carnegie's International Economics Program. His work currently focuses on trends in the global economy, the global financial crisis, and the euro crisis. Dadush previously served as the World Bank’s director of international trade and director of economic policy. He has also served concurrently as the director of the Bank’s world economy group.
Shimelse Ali is an economist in Carnegie’s International Economics Program. He holds an M.Sc. in economics from the Norwegian University of Science.
Rachel Esplin Odell is a junior fellow in Carnegie's Asia Program.
The Carnegie International Economics Program monitors and analyzes short- and long-term trends in the global economy, including macroeconomic developments, trade, commodities, and capital flows, and draws out policy implications. The current focus of the Program is the global financial crisis and the policy issues raised. Among other research, the Program examines the ramifications of the rising weight of developing countries in the global economy.
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