Aggressive action is needed to address the global financial crisis, but bailing out banks and domestic industries are measures that could—if not orchestrated carefully—provoke a devastating global trade war. International leaders at the G20 meeting on April 2 must devise a coordinated and transparent plan to re-ignite growth and avoid a resurgence of protectionism.

In a new policy outlook, Uri Dadush notes that protectionism is already on the rise: 70 percent of trade measures enacted since November 2008 restrict trade. Pressure to protect could become overwhelming as the crisis deepens, with huge potential losses.

Policy recommendations for the G20 meeting:

• Economic recovery measures—enacting stimulus plans, removing toxic assets from balance sheets, and helping the most vulnerable groups and countries—are essential but should be temporary and have a clear exit strategy.
   
• Sharing the burden fairly and visibly across G20 members will help defuse protectionism.
   
• The moratorium on new trade restrictions agreed upon at the November G20 summit should be extended through 2010.
   
• World Trade Organization (WTO) surveillance of national recovery measures should be unequivocally endorsed. Member states should be required to report all tariff and subsidy changes to the WTO immediately.
   
• Reassert a determination to conclude the Doha Round by the end of 2009.

Long-term recommendations:

• Form a working group to explore how to make the WTO more effective. As policy makers consider how to strengthen international financial architecture to prevent future crises, they should also strengthen the global trade regime to prevent a resurgence of protectionism in the future.

Dadush concludes:

“Though the impact of trade-restricting measures enacted so far is small, the risk of a devastating resurgence of protectionism is real. A trade war today would generate even greater losses than it did in its last surge during the Great Depression, when tariffs were much higher at the outset than they are today and countries were less integrated through complex international production chains.”