Leaders of the Group of 20 nations released a communiqué today outlining a number of measures intended to help the global economy recover from the current worldwide recession. While the details of the massive $1 trillion commitment quadrupling the capacity of the IMF has dominated most headlines, I found the strong language intended to discourage protectionism to be perhaps more important.
In light of rising protectionist sentiment in the United States and elsewhere that has been exploited for political purposes, the G-20 statement is a timely reminder of how barriers to trade will only serve to deepen the current downturn. A great example of a populist action that will backfire involves the recent protectionist moves by the United States to restrict trade with Mexico by limiting the operations of Mexican trucks within the United States, in defiance of the terms of the North American Free Trade Agreement (NAFTA). Let’s examine what the communiqué has to say about trade and protectionism.
Avoid the “Historic Mistakes” of Previous Eras
The communiqué begins the section on protectionism very forcefully and notes that prior “historic mistakes” will not be repeated:
World trade growth has underpinned rising prosperity for half a century. But it is now falling for the first time in 25 years. Falling demand is exacerbated by growing protectionist pressures and a withdrawal of trade credit. Reinvigorating world trade and investment is essential for restoring global growth. We will not repeat the historic mistakes of protectionism of previous eras.
Presumably this would include honoring past agreements including the provisions of NAFTA that were violated by the recent restrictions on Mexican trucking that caused Mexico to retaliate by imposing tariffs on several American products.
Fiscal Stimulus Not an Excuse for Protectionism
The communiqué appears to be cognizant of the fact that protectionist actions can often be disguised as “fiscal stimulus”:
We will minimise any negative impact on trade and investment of our domestic policy actions including fiscal policy and action in support of the financial sector. We will not retreat into financial protectionism, particularly measures that constrain worldwide capital flows, especially to developing countries;
Presumably this will cause Congress to exercise some restraint when popular sentiment leads members to propose ill conceived ideas like the “Buy American” provisions that were inserted into the fiscal stimulus bill earlier in the year. In a global economy, it is both shortsighted and foolish to use federal spending as a trade weapon.
Renewed Commitment to the Doha Round
The communiqué also renewed the commitment of the leaders to support a timely conclusion to the Doha Development Round of trade negotiations. Hopefully this will lead to salvaging this round of talks after last year’s collapse over disputes related to trade in agricultural products:
We remain committed to reaching an ambitious and balanced conclusion to the Doha Development Round, which is urgently needed. This could boost the global economy by at least $150 billion per annum. To achieve this we are committed to building on the progress already made, including with regard to modalities.
Cause for Optimism?
I am not sure how effective the rest of the G-20 plans will be, but I am optimistic about the strong statements made in favor of free trade. Not so long ago, there was nearly universal consensus that lower barriers to trade would expand the overall world economy significantly and allow countries to more effectively leverage their comparative advantage.
The best way to ensure that world GDP remains depressed would be to impose new barriers on trade or to fail to continue talks intended to lower barriers even further. The United States can lead by example in this area and reverse the ill conceived restrictions on trade with Mexico that have started a small trade war close to home. President Obama could demonstrate leadership by taking a stand on this issue and providing encouragement to other leaders facing populist drives for protectionism to resist such demands.