VISEGRAD: Protect us from protectionism

By bne IntelliNews April 17, 2009

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One of the ways the western world could kill any green shoots of recovery in emerging Europe would be to erect trade barriers. While the G20's pledge to avoid protectionism was certainly a welcome boost for export-driven developing nations, judging from recent actions by countries, mere words won't be enough.

The World Bank noted ahead of April's G20 summit in London that 17 of the members of that grouping had already introduced restrictive trade practices - a kneejerk reaction during troubled economic times like today. For example, Russia raised tariffs for nine months on imported cars, buses, butter and certain dairy products, while the US adopted "Buy American" requirements for public works projects funded under economic stimulus law. "Protectionist rhetoric plays well during a downturn," says Neil Shearing, an emerging markets economist at research firm Capital Economics. "The protectionist threat is very real and if economic nationalism increases, emerging markets in Eastern Europe have the most to lose."

But at the summit, the meeting leaders agreed that they wouldn't introduce any restrictive trade practices through 2010 or pursue financial policies that hurt other nations. To ensure this, the World Trade Organisation (WTO) and other international institutions will provide quarterly reports on any trade violations; and they would spend at least $250bn over two years to ease trade finance to be directed through export credit agencies in each country and through international institutions.

The above agreement is crucial because even under existing WTO rules, there is plenty of scope for nations to raise tariffs. According to the WTO, if countries were to increase their trade taxes to levels specified by global trade rules, the global tariff average would double and trade would shrink by an additional 8%. Global trade began shrinking in the second half of 2008 due to falling demand and a withdrawal of credit, and in 2009 it is expected to contract, perhaps by as much 9%, for the first time since the 1980s after growing around 6% in 2007.

Of the major emerging economies, Hungary and the Czech Republic are the most open and, thus, the most vulnerable to a rise in protectionism. Exports are equivalent to 80% of GDP in both countries, over half of which are shipped to the Eurozone, and the drop-off in demand for their products is reflected in industrial production contracting at an annual pace of more than 20%. "It is not surprising that the Czech government responded aggressively to President [Nicolas] Sarkozy's plans to make state support for French car firms conditional on jobs being moved back from Central Europe," says Shearing.

There is certainly a gap opening up between nations' rhetoric and their actions, but are fears of a return to 1930s-style economic nationalism overdone? Probably, say exerts. For one thing, a number of countries have already implemented measures to boost trade finance, which will be enhanced by the money promised by the G20. Second, the G20 have put some teeth in their compliance procedures by getting the WTO to monitor countries' actions, name and shame sinners in quarterly reports, and take prompt action when violations are reported.

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