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The spectre of protectionism: what next for developing countries?


How can political leaders guard against the possible rise of protectionism in this time of crisis? This is a vexed question. Richard Baldwin, Simon Evenett and 15 other international trade economists have tried to provide answers in their publication: What world leaders should do to halt the spread of protectionism.

They argue that the crisis offers a chance to conclude the Doha Round, which is seen as the best insurance against the risk of increased protectionism. But is this realistic? Does the economic crisis really provide such an opportunity? And if so, would a successful conclusion of the Doha Round really protect developing countries from the risk of increasing protectionism in industrialised countries?

Is the crisis a chance for the World Trade Organization (WTO)?
Export-dependent economies like Germany or China may have to compensate for falling demand by exploring new markets and may, therefore, be very interested in a new WTO deal.  However, the fact that most countries around the globe are facing an economic downturn will make it extremely difficult for them to make meaningful concessions, which would require the dismantling of protection from those sectors most vulnerable to external competition.
Is there a risk of massive tariff increases?

Baldwin and Evenett argue that the standstill on the Doha round raises the risk of massive tariff increases, particularly for developing countries, which could imply the reversal of ‘20 years of progress.’ This would be because of big disparities between the tariffs that countries apply to their trading partners, and those that are fixed by the WTO. However, we need to remember that many developing countries have ‘locked-in’ their tariffs with their main trading partners in bilateral agreements. In addition, they need to juggle many competing interests when applying trade policy measures. Their room for manoeuvre with respect to tariff increases has been diminished by the economic crisis, given the valid needs of impoverished consumers (and voters), as well as their domestic producers who depend on imported materials.

What about non-tariff barriers?
Baldwin and Evenett are surprisingly quiet on the risk of the increased appliance of non-tariff barriers, though these are more and more used as protectionist measures by developed countries. In particular, the requirements to respect certain environmental or labour conditions make it extremely difficult to differentiate between the necessary product and consumer safety requirements and increasing protectionism. The establishment of a surveillance mechanism to track any new protectionist measures, including non-tariff barriers, as proposed by the authors and taken on board by WTO Director-General Pascal Lamy, appears to be a good idea but is it feasible? Even the Trade Policy Reviews, carried out over weeks by in-country teams, have difficulties in identifying (and in particular, quantifying) all forms of existing trade restrictions.
What can be done to avoid the spread of protectionism and support developing countries?

Fighting the risk of increased protectionism with enhanced macroeconomic initiatives and financial instruments sounds good, but what options do poor developing countries have to ’practise Keynes at home’, as suggested by Baldwin and Evenett? We need to bear in mind that many developing countries are highly dependent on tariffs (and a limited tax base) and this limits, severely, their scope to cut taxes and to increase public spending. G8 leaders should, therefore, enable the International Monetary Fund (IMF) and the World Bank to provide better finance facilities, allowing developing countries to introduce macroeconomic stimuli – following the example of those developed countries that are responsible for the crisis.