Reference no: EM133255644

Two facts have characterized international trade between 1986 and 2007. First, the volume of world trade grew every year, creating an increasingly interdependent global economy, and second, barriers to international trade were progressively reduced. Between 1990 and 2007 international trade grew by 6 percent annually compounded, while import tariffs on goods fell from an average of 26 percent in 1986 to 8.8 percent in 2007. In the wake of the global financial crisis that started in the United States in 2008 and quickly spread around the world, this changed. As global demand slumped and financing for international trade dried up in the wake of tight credit conditions, so did the volume of international trade. The volume of world trade fell by 2 percent in 2008, the first decline since 1982, and then slumped a further 12 percent in 2009.

This contraction is alarming because past sharp declines in trade have been followed by calls for greater protectionism from foreign competition as governments try to protect jobs at home in the wake of declining demand. This is what occurred in the 1930s, when shrinking trade was followed quickly by increases in trade barriers, mostly in the form of higher tariffs. This actually made the situation far worse and led to the Great Depression.

Much has changed since the 1930s. Treaties now in place limit the ability of national governments to raise trade barriers. Most notably, World Trade Organization rules in theory constrain the ability of countries to implement significant increases in trade barriers. But WTO rules are not perfect and there is plenty of evidence that countries are finding ways to raise barriers to international trade. Many developing countries have latitude under WTO rules to raise some tariffs, and according to the World Bank, in 2008 and 2009 they were doing just that. For example, Ecuador raised duties on 600 goods, Russia increased import tariffs on used cars, while India placed them on some sorts of steel imports.

According to the World Bank, however, two-thirds of the protectionist measures taken in 2008 and 2009 were various kinds of "non-tariff barriers that are designed to get around WTO rules." Indonesia, for example, specified that certain kinds of goods, including clothes, shoes, and toys, can be imported only through five ports. Since these ports have limited capacity, this constrains the ability of foreign companies to sell into the Indonesian market. Argentina has imposed discretionary licensing requirements on a range of goods including car parts, textiles, and televisions. If you can't get a license, you can't sell into Argentina. China has stopped a wide range of imports of food and drink products from Europe, citing safety rules and environmental concerns, while India has banned imports of toys from China for safety reasons.

Developed nations in general did not take similar actions, but they sharply increased subsidies to troubled foreign domestic producers, which gave them an advantage against unsubsidized international competitors, and therefore may have distorted trade. The key example of this in 2008 and 2009 was the automobile industry. To protect national producers, hold on to jobs, and stave of bankruptcies, rich countries including the United States, Britain, Canada, France, Germany, Italy, and Sweden gave over $45 billion in subsidies to car companies between mid-2008 and mid2009. The problem with such subsidies is that they could cause production to switch from more efficient plants to less efficient plants that have an advantage due to state support. Although the WTO has rules against trade-distorting subsidies, its enforcement mechanisms are weaker than in the case of tariffs, and so far countries that have been increasing subsidies have not been challenged.

The volume of international trade has since rebounded strongly, growing by around 14.5 percent on the back of a 3.1 percent increase in the size of the global economy in 2010. As this happened, protectionist pressures abated somewhat. Trade rebounded more strongly in developing nations than in the developed world. China, in particularly, saw a massive 28.5 percent leap in the volume of its exports, which created additional trade tensions.

Read the above case study and answer the following questions:

1. Why do you think calls for protectionism are greater during sharp economic contractions than during boom periods?

2. Despite the sharp economic contraction during 2008-2009, the increase in protectionist measures was fairly modest. Why do you think this was the case?

3. During 2008-2009 many developed nations gave subsidies to their automobile producers. How might this have distorted international trade? Wag this a reasonable thing to do give the circumstances?

4. What might occur if a renewed economic slowdown triggered a wave of protectionist measures around the world? Would protectionism actually protect jobs, or would it make things worse?