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Great Expectations the G 20 and the Inevitable Predictability of Increased Protectionism

With the scheduled meeting of G-20 countries on April 2 in London getting nearer, much of the talk among leading policymakers has turned to the need to resist protectionism and use this forum for taking decisive action to conclude the Doha Round of multilateral trade negotiations.

However, as the Washington meeting of this group showed last November, the G-20 is inadequately equipped to render any grandiose commitments on the need to avoid protectionism into concrete action. Thus, as the state of the global economy worsens, it would seem only normal to brace oneself for a continued deterioration in trade flows, of which the rise in protectionism is a symptom, not a cause.

The Washington summit, which took place in November 2008, was hailed as historic given that it constituted an unprecedented attempt by government leaders to act in a coordinated fashion in dealing with what was being touted as the worst economic crisis since the establishment of the Bretton Woods system in 1945. Although it did represent a major meeting of minds in terms of closer macroeconomic cooperation, it also represented an all too familiar fall-back to hollow statements and empty political gestures, such as the following paragraph of the declaration that was issued at the end of the meeting:

?We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to [?] trade in goods and services [?]. Further, we shall strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO's Doha Development Agenda with an ambitious and balanced outcome.?

There was originally some optimism that this language would give the necessary impetus at the WTO for breaking a deadlock in the negotiations which had persisted since the breakdown of the July 2008 ministerial meeting in Geneva. Pascal Lamy, the Director General of the WTO, was busy organizing a meeting of trade ministers for shortly before Christmas, where it was hoped progress could be achieved allowing for the conclusion of modalities for the agriculture negotiations. However, these talks never took place, largely because a number of US Congressmen went on record as saying the US would never sign up to what was on the table at the time, and that it would be pointless for Lamy to convene a meeting. The DG had little choice but to postpone the meeting.

Since then, it has become clear that the G-20 leaders not only reneged on their promise to strive for to reach agreement on Doha, but have also been raising new trade barriers, or allowing them to be raised at a worrying pace. A January 23 document circulated to the WTO Membership by Lamy sought to provide a snapshot of what trade restrictions WTO Members had been setting up in response to the global crisis. The report provides a detailed inventory of a whole range of measures enacted to slow or keep out imports, in a whole range of countries, including the G-20, such as India, Indonesia, Korea, the EC, China and others.

The upcoming G-20 meeting will almost inevitably result in some commitment or other, to try and put the breaks on protectionist tendencies, and to reach a deal on Doha by the end of 2009. This is misguided for a number of reasons. First and foremost is the declining employment situation in so many countries, and the political consequences this will inevitably have. Governments are pulling any levers they can now to stave off domestic job losses, and they will put this imperative before any commitments they may or may not have made in Marrakesh Morocco, in April 1994, to abide by the rules of a far away organization located on the shores of lake Geneva.

Another factor having a chilling effect on trade at present is the drying up of trade finance. This factor is directly related to the lack of liquidity in interbank lending markets, driving the cost of credit up and making banks reluctant to extend trade finance on the same terms they were previously willing to do so. This is also something largely beyond the control of the G-20, and can only be remedied once confidence has been restored in the financial sector, by either huge injections of liquidity to banks, or by helping banks to remove or reduce toxic assets from their balance sheets.

The truth is that, despite the fact that concluding the Doha Round would probably a very good way to stimulate global demand, it involves costly and contentious political trade-offs at the domestic level that most governments are simply unprepared to contemplate given the current demands being made on them from various sectors for assistance of one kind of another, be it in the form of protectionism and relief from imports, or direct cash bail outs.

The chances of concluding Doha will only pick up once the economic situation improves and governments are prepared to sell the benefits of the political trade-offs a final agreement will involve to their electorates.

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