Keeping trade open in times of crisis

In times of economic crisis, governments face pressure to adopt measures which may restrict trade and there are real dangers that such pressures, if not addressed adequately, can lead to a dangerous escalation. Contingency measures can act as a safety valve in such instances and can play an important role in maintaining a rule-based system of multilateral trade.

> World Trade Report 2009


These are the conclusions of World Trade Organization economists in a report on contingency measures in the WTO's 2009 World Trade Report.

This year's Report examines the range of measures in WTO trade agreements that governments may call upon when facing economic difficulties (such as safeguards, anti-dumping, increase in tariffs up to allowed WTO ceilings etc) and the role that these measures can play. Trade growth will be strongly negative this year. Although this contraction appears to be slowing, the economic situation remains fragile. Continuing downside risks led WTO economists to revise further downward its forecast for 2009 world merchandise trade from a decline in volume of 9 per cent to a decline of 10 per cent. The response of governments around the world will play a big part in determining the magnitude of this decline and its duration.

“The topic for this year's World Trade Report is highly relevant to the challenge of ensuring that the channels of trade remain open in face of economic adversity. Well-balanced contingency measures, designed primarily to deal with a variety of unanticipated market situations, are key to the effectiveness and the stability of trade agreements and to avoiding high intensity protectionism” said Director-General Pascal Lamy in his introductory comments to the Report.

Through an economic, legal and political economy analysis of some measures of contingency, the Report explores the reasons why countries introduce contingency provisions in trade agreements, why they may resort to measures of contingency protection as well as the implications for an economy and for the trading system as a whole.

While these actions restrain trade flows, they also provide governments with a political margin of manoeuvre and can act as a safety valve when political pressures build. Contingency measures can be seen as an instrument of adjustment policy, to allow for temporary relief from import competition and to give the domestic firm the time to make the necessary adjustments. They can also serve to deter certain trade actions employed by trading partners. Moreover, they can act as a means of helping to maintain the rule of law in international trade, in that they channel otherwise arbitrary protectionist actions into prescribed and predictable policy measures. Finally, contingency measures may simply reflect the reality that the future is uncertain and it is either too costly or impossible to foresee all possible set of circumstances when to regulate government behaviours.

The introduction of contingency measures in a trade agreement can be instrumental if governments are to agree to ambitious levels of trade opening. Governments may be more willing to accept deeper commitments knowing that they have adjustment policy tools in the form of contingency measures. In addition, contingency measures preserve the credibility of an agreement. An agreement that foresees the possibility to use certain measures to manage unforeseen circumstances of economic or non-economic difficulties has a better chance of remaining robust than an agreement that results in regular non-compliance.

Trade policy flexibilities are not harmless. The Report highlights the importance to distinguish between the initial motivations for introducing flexibilities in a trade agreement and the consequences of using such flexibilities. The fact that trade contingency measures are necessary to ensure further opening and stability of a trade agreement does not mean they are without cost. First, in the absence of market failures, trade restrictions will cause losses in economic welfare. Second, flexibilities may be used to backslide on previous commitments.

“The challenge in designing contingency measures is to strike a balance between flexibility and commitments. Too much flexibility may undermine the value of commitments but too little may render the rules unsustainable. It is for this reason that the design of contingency measures is frequently a central element of negotiations”, said Director-General Lamy.

The analysis of economic effects of the use of contingent measures reviewed in the World Trade Report suggests two main conclusions. First, the design of such measures should aim at limiting the circumstances when they can be used as a protectionist device. Second, the design of contingency measures should not undermine the role of trade agreements. Contingency measures should not be designed in a way that upsets the balance of a trade agreement nor which undermines governments' objective of making a binding commitment to the private sector.

The Report also analyses whether WTO provisions provide a balance between giving governments necessary flexibility to face difficult economic situations and limiting the use of these measures for protectionist purposes. In so doing, the Report focuses primarily on safeguards, such as tariffs and quotas, which may be introduced to counter increased imports deemed injurious to domestic industry, anti-dumping duties which can be imposed to respond to alleged injury caused by “dumped” imports, and countervailing duties which can be used to offset foreign subsidies considered injurious to the domestic industry. The Report also discusses policy options, such as the renegotiation of tariff commitments, the use of export taxes, and the increases in tariffs up to their legal maximum ceiling or binding.

One overall conclusion of the Report is that since flexibility is not costless, exercising restraint is beneficial. Transparency and effective monitoring may make a decisive contribution to help manage trade policy, especially in adverse economic circumstances. Free-flowing information on policies affecting trade is essential for cooperation among countries seeking to manage the crisis. Comprehensive and timely notification of trade contingency measures to the relevant WTO bodies is needed to ensure proper monitoring.

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