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Despite sharing an overarching policy built around trade and investment openness, G20 countries such as China, India and others are following the US in reverting to tariffs to protect domestic markets. Jacopo Dettoni looks at whether this could derail the global recovery.

Donald Trump’s election as US president marked a turning point in the recent history of international trade, bringing into the mainstream a school of thought that has questioned the dynamics of global markets since the 1990s. “Tariffs are the greatest,” Mr Trump tweeted in July, a few hours before going into a new round of trade negotiations with the EU.

As the White House deepens its trade war with China, citing years of alleged unfair practices, the G20 bloc – once the global champion of globalisation – is raising trade barriers at an unprecedented pace.

Free trade stutters

Established treaties such as Nafta have come under attack, while new proposed free-trade blocs are making little progress. These range from the Trans-Pacific Partnership – which inevitably remains crippled without the US even in its revived 11-country version – to the slower-than-expected integration of Asian markets through frameworks such as the Association of South-east Asian Nations’ Regional Comprehensive Economic Partnership.

Beijing also maintains a relatively protectionist attitude to global trade and investment, despite president Xi Jinping taking a lead in advocating for global trade. Other major Asian countries such as India show a similar level of dualism.

On the other hand, the EU and Japan closed a major trade deal earlier in July, reiterating their role at the forefront of trade and investment liberalisation to counter the mounting wave of protectionism of the past few years  – although the same EU has to fend off several protectionist forces gaining momentum among its members.

A recovery in jeopardy?

Even a new wave of domestic industrial policies built around a concept of openness to trade and investment hide several protectionist mechanisms. This unresolved, lingering feeling of ambiguity within the G20 community, and the proliferation of restrictive trade measures, hit just as global trade was growing at the fastest pace since the financial crisis, and “could place economic recovery in jeopardy”, the World Trade Organization (WTO) has warned.

“The marked increase in new trade restrictive measures among G20 economies should be of real concern to the international community,” WTO director-general Roberto Azevêdo wrote on July 4. “This continued escalation poses a serious threat to growth and recovery in all countries, and we are beginning to see this reflected in some forward-looking indicators. I urge G20 leaders to show restraint in applying new measures and to urgently de-escalate the situation. I will continue working with the G20 governments and all WTO members to this end.”

In the first half of 2018, Mr Trump unleashed a trade war on China with little precedent in recent history, announcing new rounds of tariffs worth hundreds of billions of dollars, prompting an immediate retaliation from Beijing with similar, though less biting, tariffs. The White House also imposed tariffs on steel and aluminium from its established trade partners such as Mexico, Canada and the EU.

Where the US leads...

Meanwhile, other major economies have been taking steps in the same direction. During the presentation of India’s new budget, finance minister Arun Jaitley said he was “making a calibrated departure from the underlying policy in the past two decades, wherein the trend largely was to reduce the customs duty” and announced new imports tariffs to protect certain sectors right away.

Overall, G20 countries established about six trade-restrictive measures a month between mid-October 2017 to mid-May 2018, twice as many as in the same period 12 months prior, according to WTO figures. This covered an overall value of goods estimated at $74.1bn, which also marks a sharp increase (150%) on the previous year.

As Mr Trump raises barriers, China has declared itself an unlikely champion of free trade. Yet according to EU figures, it remains one of the world’s most restrictive countries to foreign trade, with 25 active trade and investment barriers at the end of 2017 – second only to Russia’s 36. Other fast-growing economies such as Indonesia (23), India (21) and Brazil (21) follow closely. The US is catching up with 20 trade and investment barriers.

Even free-trade agreements can harbour subtle protectionist mechanisms. According to long-time global trade sceptic and Harvard professor Dani Rodrik, modern agreements “may result in freer, mutually beneficial trade, through exchange of market access. But they are as likely to produce welfare-reducing or purely redistributive outcomes under the guise of free trade.” In a paper published in February 2018, he argued that they tend to protect the interest of certain sectors (such as banking, pharma and multinationals) in export-oriented countries, at the expense of other less-represented interests.

Hidden restrictions

Protectionism is also visible at a domestic level. A new crop of industrial policies built on market openness has mushroomed in the past five years. International trade – and above all investment attraction – has become a key feature of the policies promoted by national governments to nurture domestic manufacturing, even more so since advanced manufacturing began disrupting global value chains. This has prompted policymakers to prioritise a technology catch-up that will define the competitiveness of local industries for years to come, in both developed and developing countries.

However, they still hide trade and investment-restrictive elements. “The overwhelming majority of the new generation of industrial policies have the investment policy element as the instrument to achieve the policy goals,” says James Zhan, director of investment and enterprise at Unctad.

Unctad has identified four typical sets of investment policies within an overarching industrial policy: incentives and performance requirements related to the incentives; special economic zones (SEZs), with about 4500 existing SEZs across the globe; new investment facilitation and promotion strategies; and screening and monitoring mechanisms. “Many countries are tightening up screening and monitoring of their investment strategies, in that sense there could be hidden protectionism,” says Mr Zhan.

Screening or blocking?

The OECD reached the same conclusion as Unctad after looking into recent dynamics in its FDI Regulatory Restrictiveness Index, which assesses the level of FDI openness of OECD countries.

“This analysis provides very little evidence of backtracking of investment policy reforms but rather shows a continued reform impetus in those countries which traditionally have been the most restrictive,” said an OECD analysis published in March 2017. “At the same time, the gradual re-imposition of screening mechanisms, often tied to national security considerations, could provide the means for backtracking in the future if the notion of national security is later stretched to encompass strategic sectors or firms.”

The US’s House of Representatives passed a bill in July aimed at reining in Chinese investment and strengthening the screening powers of the Committee on Foreign Investment in the United States. Across the Atlantic, the EU is moving forward with a plan to establish its own investment screening mechanism.

The WTO predicts global trade will rise between 3.1% and 5.5% in 2018, and by 4% in 2019, although risks remain should protectionism measures escalate further. The challenge facing G20 countries is to strike a balance between the needs of local economies and what is good for global trade, and settling the tug-of-war between those banging the drum for trade protectionism and those advocating a more liberal approach.

This article is sourced from fDi Magazine
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