Why the siren calls of protectionism fall on deaf ears
This crisis has focused policymakers’ attention on how obsolete a protectionist approach would be in the 21st century.
One of the more surprising aspects of the current economic crisis is the absence of any dramatic increase in protectionism. One of the central reasons why this has not happened – and why trade liberalisation continues – is the recognition by large economies that supply chains are global. Interrupting the chain by shutting out your neighbour can mean shutting down your main industry.
Pascal Lamy, the director-general of the World Trade Organization (WTO), made this point very clearly in a speech in mid-October. Broadly, Lamy contended that international trade no longer refers to trade between nations – as Adam Smith thought of trade – but, rather, trade between multinational companies that move the various stages of the production process to the most cost-efficient markets. The iPod is a classic example. Its packaging may say ‘Made in China’, but this masks the reality of US design, Japanese microchips, Korean flat-screens and Chinese assembly. In reality, less than 10% of the value of the product may actually be added in China.
But to what extent is this reflected – or should this be reflected – in EU policies?
The most recent indication of the future direction of EU trade policy came in the European Commission’s communication on trade, growth and world affairs, published in November. The communication identifies two strands of change in the composition of EU trade: a more global pattern of production, and the effect of emerging economies on demand for European exports.
The first strand reflects Lamy’s point, acknowledging that production is changing to become more global in nature, led by companies with large supply chains. If this model is to remain viable, trade policy must remain open. That two-thirds of EU imports are inputs used in European production is proof of the competitiveness generated by external trade for European companies.
Secondly, the Commission recognises changes in patterns of economic growth, with 90% of growth predicted to take place outside the EU by 2015, much of it in south and east Asia. The Commission paper’s stated emphasis on the EU’s recently renewed market-access strategy is encouraging; increased market access in external markets will be key components of future growth.
The main vehicle for securing these benefits remains the various free-trade agreements that the EU is currently negotiating. The eagerness that Karel De Gucht, the European trade commissioner, has shown in pursuing free-trade agreements in all regions of the world is a positive sign that despite the US’s unenthusiastic attitude and lack of progress on Doha, the EU is very much open for business. In parallel with this, the Communication also reveals a focus on deepening “our trade and investment links with other big economies in the world – the US, China, Japan and Russia”.
But does this respond adequately to the changes in patterns of production and the growing importance of supply-chain companies in the EU economy? The answer to this question, as so often, lies in implementation and enforcement. A genuine commitment to concluding free-trade agreements with major trading blocs needs to be demonstrated by all actors, including, importantly, the European Parliament. To complement this opening of ‘new’ markets, the Commission must remain an advocate of market access for European companies if the EU is to benefit, as it wishes to, from the new world economic model.
Trade and imports are essential to the EU’s economy and will be the driving force for growth and for job creation. This is the rationale of companies that are already benefiting from the process of globalisation and, for now at least, it looks to be the Commission’s rationale too.
Roderick Abbott is a former deputy director-general of the World Trade Organization and is now a senior adviser to APCO Worldwide. Nora Delaney is a consultant at APCO Worldwide.