Sunday 19 Aug 2018 | 20:07 | SYDNEY
Sunday 19 Aug 2018 | 20:07 | SYDNEY

Addressing the cause of protectionism

13 February 2009 09:50

Bill Carmichael is a former Chairman of Australia's Industries Assistance Commission and is a member of the Tasman Transparency Group. Cross-posted at VoxEU.

G20 leaders face a major challenge when they meet again in April 2009. Following the collapse of the Doha Round, the challenge now is for them to find a way to act on their commitment to resist protectionism. A good start would be to come to grips with what causes protection.

The WTO got to the heart of the matter in a recent study to discover why its international negotiations were breaking down. After reviewing the experience of forty-five member countries in the Doha Round, the study concluded that outcomes from multilateral trade negotiations depend on decisions taken by individual governments at home, about their own trade barriers, and reflects the interaction between private interest groups and systems for national decision-making:

This compilation of forty-five case studies…demonstrates that success or failure is strongly influenced by how governments and private-sector stakeholders organise themselves at home…Above all, these case studies demonstrate that…sovereign decision-making can…undermine the potential benefits flowing from a rules-based international environment that promotes open trade.

The Doha Round failed because protected interests dominated the negotiating strategies of their governments, just as it has dominated many of their responses to the current crisis. Their negative influence, however, is not limited to the Doha Round or the crisis. Its threat to global prosperity is long term and ongoing, and will not cease when the present crisis ends. Any response must therefore be effective in the long, as well as the short, term.

A response proposed by a group of Australian and New Zealand industry and business organisations, the Tasman Transparency Group (TTG), addresses protectionist pressures directly — at their source in domestic policy — while leaving governments in full control of domestic policy. It simply involves adding a domestic transparency process — crafted, owned and operated by individual WTO countries — to the existing international processes on which the WTO relies. This response reflects a growing recognition that:

  • the existing international disciplines on which the WTO has relied are not providing a persuasive domestic reason for lowering trade barriers;
  • it is the positive or negative perceptions at home about the domestic consequences of liberalising that determines how much actually takes place; and
  • it becomes politically realistic to secure the gains from lowering domestic barriers only when pressure from protected domestic interests, who see it as detrimental to their interests, is balanced by a wide domestic awareness of the overall domestic benefits from adjusting to the domestic changes involved.

The logic underpinning the domestic transparency response is as follows:

  • the greatest gains available to countries liberalising through multilateral trade negotiations  come from reducing their own barriers;
  • the residual gains available from liberalising in a multilateral context— those resulting from greater access to external markets — materialise only when participating countries agree to reduce the barriers protecting their own less competitive industries; 
  • both the major unilateral gains (from liberalising domestic markets) and the additional gains (potentially available from multilateral trade negotiations) depend on participating countries approaching the negotiating table with ‘offers’ consciously structured to secure the gains from liberalising their own markets; 
  • the contribution of the proposed domestic transparency arrangements is to counter the negative influence protected domestic interests now exercise over the market-opening 'offers' participating governments take to Geneva;
  • it will do so by enabling WTO member governments to raise community awareness of the domestic costs of maintaining their own trade barriers, and the economy-wide benefits from removing barriers to international competition; 
  • protected domestic interests will then find it more difficult to gain community support for resisting market opening commitments widely seen as nationally beneficial.

This response to the challenge facing G20 leaders brings into account a reality that existing WTO processes cannot address. The WTO has no authority to deal with the domestic pressures threatening its future viability. It is simply a set of rules and an international negotiating forum, driven in both cases by what its member countries are prepared to agree to. That is the source of its present difficulties, and conveys a great deal about the options available to strengthen its ability to open world markets.

The influences that have stalled progress in multilateral trade negotiations operate in the domestic political arena, focus on domestic policy issues, and exercise power over domestic decision-making. The lesson from the Doha Round is that the key decisions are made at home, under pressure from protected domestic producers seeking to avoid the adjustment involved for them. When governments succumb to those pressures, as they have in the Doha Round, they not only forego the unilateral gains (in domestic efficiency) as a result of failing to reduce their own barriers. They also diminish the capacity of the WTO to deliver the additional gains (improved market access) available from liberalising in a multilateral context.

It follows that WTO processes must in future begin with decisions taken at home to secure the major gains from liberalising domestic markets, and culminate in international negotiations — not the other way around.

It would be unrealistic to expect this response to gain wide international acceptance immediately. The logic on which it is based, while rock-solid, is counter intuitive. It is easier to believe that the national gains available from multilateral negotiations depend on the capacity of our negotiators to secure access to external markets while conceding as little as possible at home. Gaining support for it will therefore require strong leadership and ongoing effort by G20 leaders, and it would be unwise to set a rigid timetable for that. Its relevance in responding to the domestic origins of protectionism, not the difficulties of gaining acceptance of it in the short term, should determine the priority given it in further G20 discussions.

As a first step, G20 leaders could introduce domestic transparency procedures into their own decision-making on protection. In the case of the US, for instance, the change required involves simply adding to the existing charter of the US International Trade Commission a requirement that its public reports account for the economy-wide consequences of its recommendations on protection.

The strength of the domestic transparency response proposed by the TTG is that:

  •  it identifies, and responds directly to, the major influences that stalled progress in the Doha Round;
  • there are no other responses on offer (or in prospect) that address those influences at their source, while  respecting the autonomy of national governments over domestic policy;
  • it is not possible to bring ‘behind-the-border’ barriers,  pervasive in world markets for services and widely seen as belonging to domestic policy, into multilateral trade reform except through  domestic processes.

Without such a domestic discipline, outcomes from multilateral trade negotiations will continue to be the accidental result of a balancing act — in the international arena — between the requests of foreigners and the demands of domestic pressure groups. In that event, countries participating in multilateral trade negotiations will continue to be seriously short changed. 

The fate of the Doha Round has confirmed both the nature of the threat facing G20 leaders and what they need to do about it. It is in their own national self-interest to embrace the domestic transparency response, because it deals with the protectionist pressures they all face at home. It would enable them to encourage those domestic economic activities that can contribute to future national prosperity, instead of continuing to artificially sustain those that cannot.