The Global Economic Downturn and Protectionism

Congressional research reportAug 26, 2009

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The Global Economic Downturn and

Protectionism

-name redactedSpecialist in International Trade and Finance

August 26, 2009

Congressional Research Service

7-....

www.crs.gov

R40461

CRS Report for Congress

Prepared for Members and Committees of Congress

The Global Economic Downturn and Protectionism

Summary

In today’s severe global economic downturn, concerns are being raised that countries may try to

improve their own trade positions in order to help domestic industries at the expense of others by

imposing measures that artificially increase their exports or restrict imports. Such efforts are

considered by some to be a form of “protectionism” and are often referred to as beggar-thyneighbor policies.

This report develops three scenarios to approximate different dimensions of the relationship

between the global economic downturn and protectionism. The scenarios are not predictions, but

descriptions of how and why pressures for protection could be manifested and transmitted under

different circumstances and assumptions.

Under a low impact scenario, existing World Trade Organization (WTO) rules and obligations,

bolstered by a high level of global interdependence, discourage trade restrictions and trade

diverting measures from being proposed. If implemented, the measures conform to WTO rules

and/or have a limited impact on trade flows. Recent reports issued by the WTO and World Bank

provide preliminary support for this scenario.

Under a medium impact scenario, WTO rules are violated or are disregarded due to the

exigencies of the economic crisis and demands to provide financial rescue plans for the banking

and auto sectors. As a result, trade and investment flows over time could be diverted or fall

outside WTO surveillance, thereby weakening the global trading system.

Under a high impact scenario, WTO rules are violated, major trade conflict occurs, and the

world trading system is undermined. This threat arises from the longstanding presence of large

trade imbalances driven by distorted global consumption and savings patterns—patterns that were

an underlying cause of the global economic downturn. Given the prominent role that China and

the United States play in the global imbalances, two flashpoints for any outbreak of protectionism

can be identified. The first could stem from U.S. public concerns that other countries are gaining

a “free ride” in terms of international efforts to increase aggregate spending and get the world

economy growing again. The second could arise if China and other surplus countries try to avoid

massive factory closings and layoffs by exporting their overcapacity to the United States and

Europe with trade policy measures such as export subsidies and currency depreciation.

Three broad policy challenges for Congress are derived from the analysis. The first deals with

international surveillance of fiscal stimulus programs. The second relates to multilateral

surveillance of trade pressures and barriers proposed and adopted during the economic crisis. The

third pertains to the joint management of U.S. trade relations by Congress and the administration,

particularly as it bears on responding to constituent requests for protection, facilitating the

adjustment of current account surplus countries, and formulating trade liberalization priorities.

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Contents

Introduction ................................................................................................................................1

Low Impact Scenario: Firewalls Hold As WTO Rules and Obligations Constrain

Protectionist Measures .............................................................................................................3

Firewalls Against Protectionism ............................................................................................3

Scorecard of Protective Measures To Date.............................................................................4

Proposals Modified ...............................................................................................................5

Medium Impact Scenario: WTO Rules Prove Inadequate, Particularly for Sector-Specific

Assistance, and Trading System Is Weakened ...........................................................................7

Auto Sector Rescue Programs ...............................................................................................7

Financial Sector Rescue Programs.........................................................................................9

High Impact Scenario: WTO Rules Are Violated, Major Trade Conflicts Occur, And

Trading System Is Undermined ................................................................................................9

Re-balancing Trade Flows................................................................................................... 10

Dealing with Fiscal Stimulus “Free Riders”......................................................................... 11

Current Account Surplus Countries – Transitioning To Domestic-Led Growth..................... 14

Policy Challenges for Congress ................................................................................................. 15

Coordination and Surveillance of Stimulus Programs .......................................................... 16

Multilateral Surveillance of Trade Barriers .......................................................................... 17

Management of U.S. Trade Relations .................................................................................. 17

Responding to Requests for Protection .......................................................................... 18

Dealing with Current Account Surplus Countries........................................................... 18

Considering the Role of Trade Liberalization................................................................. 19

Tables

Table 1. Stimulus Packages in Large Countries.......................................................................... 12

Table 2. Change in Overall Fiscal Balance................................................................................. 12

Contacts

Author Contact Information ...................................................................................................... 19

Acknowledgments .................................................................................................................... 19

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Introduction

The world economy may now be undergoing its most severe crisis since the Great Depression.

The economies of the United States, Japan, and Europe are in recession and the emerging

economies in Asia and Latin America are experiencing slower growth as well. According to the

International Monetary Fund (IMF), world economic activity is projected to contract by 1.3% in

2009, the first such fall in 60 years. Developed countries are projected to be the hardest hit, with a

3.8% decline in overall output. Developing countries are expected to grow on average by only

1.2%, after growing by 5.9% in 20081

As economic activity has slowed around the globe and trade finance has become harder to obtain,

world trade flows have also declined. The decline, which began in the summer of 2008, has

affected all the major trading countries. Overall, the World Bank is predicting that world trade

flows will decline by 10% in real terms in 2009 after growing by 4% in 2008. Exports of

developed countries are forecast to drop by roughly 14% and the decline for developing countries

is projected to be about 7%.2

Emblematic of these concerns, the leaders of the most-developed G20 countries proposed at a

November 2008 meeting “to refrain from raising new barriers on trade in goods and services” for

at least 12 months. A second G20 leaders meeting in April 2009 similarly committed to “... refrain

from raising new barriers to investment or to trade in goods and services, imposing new

restrictions, or implementing WTO inconsistent measures to stimulate exports” until the end of

2010, and to “rectify promptly any such measure.”

Underlying these declarations was a view that government efforts to shield local companies from

the global economic downturn through the imposition of trade barriers would only curb economic

growth and prolong the global downturn. More starkly, there was an additional concern that a rise

in trade barriers could turn the global downturn into a global depression. In the view of some

analysts, this is what happened in the 1930s as a result of the passage of the U.S. Smoot-Hawley

Tariff Act of 1930, an event which triggered a cycle of retaliation and counter-retaliation.

Smoot-Hawley Tariff Act

The Smoot-Hawley Tariff Act of 1930 raised U.S. tariffs on over 20,000 products to an average level of 60%. After the

U.S. passed the bill, other countries retaliated by raising their barriers to U.S. exports. World trade flows incurred a

severe 66% drop between 1929 and 1934. Some economists argue that this huge drop in trade was what made the

Depression great, by prolonging and deepening what had been a global recession. Other economists argue that U.S.

tariffs were already quite high and that other factors such as misplaced faith in reliance on the gold standard and

balanced budgets were bigger causes of the Great Depression. Greater consensus appears to exist on the notion that

it is far better to keep markets open and increase world demand than to divert demand in national markets to

domestic producers by raising trade barriers during a global recession.

The specter of widespread protectionism or trade wars has been the subject of numerous

newspaper and press articles.3 Until recently it was possible to dismiss many mass media alarms

International Monetary Fund, World Economic Outlook Update, July 8, 2009.

World Trade Organization, Report To the TPRB From the Director General on the Financial and Economic Crisis and

Trade-Related Developments, WT/TPR/OV/W/2, July 15, 2009.

See Carter Dougherty, “Protectionism: The View from Europe,” New York Times, March 9, 2009; Catherine Rampell,

“The Contagion of Protectionism,” New York Times, March 6, 2009; Anthony Faiola, “Trade Barriers Threaten Global

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on the grounds that today’s global economy has numerous firewalls against protectionism that did

not exist in the 1930s. But the accelerating global economic decline has increased pressures on

policymakers to adopt a number of measures to assist distressed industries that are considered by

some observers to be “protectionist.”

Protectionism is a very elastic concept with multiple meanings. For many economists, no form of

protection is legitimate because such interventions distort prices and misallocate resources over

time. For some trade lawyers, only measures that are not consistent with WTO rules and

obligations are protectionist and considered unacceptable. For many political realists and

policymakers, protective measures that provide help to constituents in times of economic distress

are a political responsibility and necessity, not protectionism. For some historians, efforts by

countries to improve their own trade position and help domestic industries at the expense of

others by imposing measures that artificially increase exports or limit imports describe

protectionism. Still other historians define protectionism as a return to the policies of the 1930s,

which are characterized by substantial across the board increases in trade barriers often directed at

particular countries and cycles of retaliation and counter-retaliation.

To analyze the relationship between the economic downturn and protectionism, this report

constructs three scenarios. Each scenario reflects a different dimension of the relationship

between the economic downturn and protectionism. The scenarios are a continuum based on an

analysis of the situation today to the direction that trade protectionism could take under different

assumptions and circumstances. The scenarios are not predictions, but descriptions of how and

why protectionist pressures could be manifested and transmitted under very different situations

and policy responses.

Under a low impact scenario existing WTO rules and obligations, bolstered by a high level of

global interdependence, keep pressures for protection under control. Proposals for protection, if

implemented, have a modest impact on global trade flows.

Under a medium impact scenario WTO rules prove inadequate or are disregarded due to the

exigencies of the economic crisis. As a result, trade and investment flows over time could be

diverted or fall outside WTO surveillance, thereby weakening the world trading system.

Under a high impact scenario WTO rules are violated or ignored, major trade conflicts occur,

and the world trading system is damaged. This threat arises from longstanding trade imbalances

driven by distorted global savings and consumption patterns.

The depth and duration of the economic downturn likely will be a major determinant of which

scenario or scenarios prevail. At the same time, the degree to which protectionist measures are

adopted could affect the course of the economic downturn as well.

A concluding section discusses several policy challenges that rising pressures for trade protection

may pose for policymakers and the 111th Congress. This issue has been on the agenda of the G-20

countries when the leaders met in London in April 2009 and on the agenda of the G-8 countries

when the finance ministers met in Trieste in June 2009.

(...continued)

Economy: World Bank Finds Protectionist Trend,” Washington Post, March 18, 2009; Jeffrey E. Garten, “The

Dangers of Turning Inward,” The Wall Street Journal, March 1, 2009; and Ariana Eunjung Cha, “U.S.-China Trade

Ties Erode Amid Accusations From Each Nation Complaining of Protectionism,” Washington Post, February 20, 2009.

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Low Impact Scenario: Firewalls Hold As WTO Rules

and Obligations Constrain Protectionist Measures

There are a number of reasons why the threat of a return to protectionist, beggar-thy-neighbor

policies could be vastly overstated. Unlike the 1930s, today’s global economy has several strong

firewalls to prevent governments from raising trade barriers that result in a cycle of retaliation

and counter-retaliation. These firewalls include more institutionalized obstacles to protectionism

built into the WTO system, more policy instruments to address the economic slowdown, and a

more interdependent and open world economy than existed in the 1930s.

In addition, some in today’s media may tend to overstate the threat of protectionism by not

always distinguishing between protectionist actions and protectionist pressures and/or by equating

legitimate forms of protection with protectionism. The fact that there is ample room for increases

in trade measures and barriers that are consistent with the rules and obligations of the WTO often

may go unappreciated in some press coverage. These trade measures and barriers include

increases in applied tariffs to bound rates, and imposition of countervailing and antidumping

duties, so-called ‘defensive’ trade measures.4 Protection for limited periods of time and under

prescribed conditions is built into the rules of the WTO as a political safety valve and as a

recognition of the human and social costs that are associated with the often wrenching

adjustments that accompany increased trade competition.

Firewalls Against Protectionism

WTO rules today serve to keep a lid on trade barriers of its 153 members through an elaborate set

of mutual obligations and dispute settlement procedures. Unlike the 1930s when countries could

impose higher trade barriers unilaterally without violating any international agreements or

anticipating a foreign reaction, under today’s rules members can take their disputes to the WTO

for settlement rather than engaging in reciprocal retaliatory actions. The fact that countries

violating WTO obligations can face WTO-sanctioned retaliation helps constrain outbreaks of

unilateral actions that could be mutually harmful. 5

Pressures for protection are also dampened by a world economy that is much more interdependent

and integrated than in the 1930s.6 Leading producers have become so international in their

production operations and supply chains that they have developed a vested interest in resisting

protectionism.7 Many industries that have faced import competition in the past – such as

Some 26 WTO members, including Australia, Brazil, India, and South Korea, impose tariffs (so-called “applied”

tariffs) that average roughly 8%. Because these tariffs have not been “bound” through WTO negotiations, they could be

raised as high as 28% on average without breaking any WTO rules or requirement to compensate affected trade

partners. The potential costs if these countries decided to increase tariff rates to their bound level to protect domestic

industries are potentially significant, decreasing world trade by an estimated 7.7%. See Antoine Bouet and David

Laborde, “The Potential Cost of A Failed Doha Round,” International Food Policy Research Institute,, Issue Brief 56,

December 2008.

Paul Blustein, “The Nine-Day Misadventure of the Most Favored Nations: How the WTO’s Doha Round

Negotiations Went Awry in July, 2008,” Brookings Institution, 2009.

The simple average share of world trade to GDP, which is 96% today compared to 70% in 1970, illustrates the

increased interdependence. Source: World Bank.

(name redacted),Globalized Supply Chains and U.S. Policy, CRS Report R40167, Globalized Supply Chains and U.S.

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televisions and semiconductors—have found that international diversification or joint ventures

with foreign partners are a more profitable way of coping with global competition than blocking

goods at the border. In addition, many domestic industries have less incentive to ask for import

restrictions because foreign rivals now produce in the domestic market, eliminating the benefits

of trade barriers for domestic firms.8

Unlike the early 1930s, when governments took little responsibility for propping up financial

institutions and were unable to pursue expansionary monetary policies due to fixed exchange

rates under the gold standard, policymakers around the world today are adopting expansionary

fiscal and monetary policies. These expansionary policies, in turn, have the capability of

dampening protectionist pressures and demands that stem from job losses and related economic

hardship with lower interest rates and increased expenditures on unemployment benefits and

health care benefits.9

A related consideration is that today’s world economy is much more open than the world

economy of the 1930s. Average tariffs on world trade have come down from the 50% range in the

1930s, to the 25% range in the 1980s, and to less than 10% today.10 Under these circumstances, it

would require tremendous increases in protection to get the world back to anywhere near the

conditions of the 1930s, although a major increase in tariffs (e.g. a doubling) would be disruptive

even if it left tariffs well below the 1930s levels.

Scorecard of Protective Measures To Date

Empirical support exists for the view that existing legal, economic, and political firewalls are

restraining today’s protectionist pressures. Most importantly, Pascal Lamy, the WTO’s Director

General, reported in January 2009 that most WTO members have successfully kept domestic

protectionist pressures under control “with only limited evidence of increases in trade restricting

or trade distorting measures” taken during the last six months of 2008. This assessment was based

on the first report of the WTO secretariat on the trade effects of the global economic crisis. The

report found only “limited evidence” of an increase in tariffs, non-tariff barriers or trade-remedy

actions by member countries, but noted that the most significant actions taken in response to the

global crisis have involved “financial support of one kind or another to banks and other financial

institutions and to certain industries, notably the automobile industry.”11

The WTO report notes tariff increases on selected products being implemented by India, Russia,

Ecuador, and Ukraine. Countries adopting non-tariff measures include Indonesia (port of entry

barriers) and Argentina (import licensing requirements). Argentina was cited for measures that

attempt to boost exports of selected products. But the report indicates that there has been “no

(...continued)

Policy, by (name redacted), January 16, 2009.

Douglas A. Irwin, “Trade Policy in 2008: Great Depression Redux?”, In What World Leaders Must Do to Halt the

Spread of Protectionism, Richard Baldwin and Simon Evenett, editors, A VoxEU.org Publication, Centre for Economic

Policy Research (CEPR) 2008, p. 61.

Wendy Dobson, “Keeping the Global Economy Open,” In Richard Baldwin and Simon Evenett, p. 28.

There are wide variations among countries between agricultural and manufactured goods.

WTO Staff, “Report to the TPRB From the Director-General on the Financial and Economic Crisis and TradeRelated Developments,” JOB(09)2, January 23, 2009.

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dramatic increase” in antidumping investigations in the second half of 2008 compared to first half

of 2008, but raised the possibility of increased trade remedy actions in 2009.12

In two follow-up reports to date, the WTO has reached similar conclusions of mixed trade policy

developments. On the one hand, WTO monitoring efforts have detected an increase in trade

restrictions and distortions in selected tradable goods sectors of the world economy. On the other

hand, the WTO has noted that more governments have introduced trade-opening and facilitating

measures in 2009 to date.13

The World Bank, which has also been monitoring trade restrictions proposed and adopted since

the beginning of the financial crisis, reached a conclusion similar to that of the WTO. Its initial

report determined that there have been 47 trade restrictive measures imposed since the financial

crisis began last summer, including 17 from G-20 countries, but that “these measures have

probably had only marginal effects on trade flows to date.” In addition to the measures cited by

the WTO, the World Bank report cited China’s import ban on various food products from the EU,

and export subsidies provided by the EU, China, and India. Contrary to the WTO report, the

World Bank report determined that “the number of antidumping cases (both investigations

initiated and imposition of duties) surged in 2008.”14

Proposals Modified

Further support for the “firewalls are holding” perspective can also be found in the evolution of

proposals for protection that have been either modified or withdrawn. The two most prominent

cases that fit this description are a Buy American provision contained in the U.S. stimulus

legislation (P.L. 111-5, Sec. 1605),15 and a French proposal to require its carmakers to produce

and source locally.

As originally passed by the House on January 28, 2009, the stimulus bill contained a provision

that would have required the use of U.S. iron and steel for infrastructure projects funded by the

bill. The Senate’s amended version of the provision, which prevailed in conference, went further

in requiring the use of U.S. manufactured goods (in addition to iron and steel) in specified

projects, but also included language requiring that the provision had to be implemented in a

manner consistent with U.S. international trade obligations. This language was vigorously

supported by U.S. multinational companies and trading partners such as the European Union and

Canada.

Some observers maintain that the Buy American provision agreed to in the stimulus bill may have

only a very limited impact on international trade flows. This is because the law waives Buy

Bureau of National Affairs, “WTO Report Finds Limited Impact So Far Of Financial Crisis on Higher Trade

Barriers,” International Trade Reporter, January 27, 2009.

WTO Reports on Recent Trade Developments, “Global Crisis Requires Global Solutions – Lamy,” WTO News

Items, July 13, 2009.

Elisa Gamberoni and Richard Newfarmer, “Trade Protection: Incipient but Worrisome Trends,” World Bank, VOX,

March 4, 2009.

The provision provides that none of the funds appropriated or otherwise made available by the act may be used for a

project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron,

steel, and manufactured goods used in the project are produced in the Unites States provided such action would not be

inconsistent with the public interest, such products are not produced in the United States, and would not increase the

cost of the overall project by more than 25%. U.S. major trading partners have similar buy domestic provisions.

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American restrictions according to a number of broad public interest tests, including if “the

relevant manufactured goods are not produced in the United States in sufficient and reasonably

available quantities.” With imported goods now comprising nearly 40% of all manufactured

goods sold in the United States, imports in a large number of areas may not be constrained.16

Supporters also say the Buy American provision is the kind of measure that is often dubbed

“protectionist” on questionable grounds. Up until 1979, when the Tokyo Round of trade

negotiations reached agreement on a voluntary Agreement on Government Procurement (AGP),

government procurement was entirely excluded from international trading system obligations.

Today only 39 of 153 WTO members have joined the AGP, an agreement that opens up

government procurement according to negotiated sectors, agencies, and thresholds. The limited

nature of the AGP reflects, in part, the fact that government procurement decisions are still

viewed largely as a means of achieving legitimate domestic policy goals, including increasing the

probability that public spending will generate domestic jobs.17

Opponents dispute the claims that this provision may have a small impact on international trade

and is not “protectionist.” A key assertion is that many major U.S. trading partners that are not

signatories to the AGP, such as Brazil, China, and India, will face discrimination in bidding on the

projects covered by the law. Facing such discrimination, these countries may decide to retaliate

by pressuring their companies perhaps to buy from European producers instead of U.S. suppliers

or by pursuing their own buy-national policies. For example, while China recently removed from

one of its recent stimulus bills a provision instructing “governments of different levels to give

priority to home-grown light-industry products,” the mere public introduction of the clause

reportedly has been enough to get provincial authorities to favor local over foreign suppliers in

the procurement of a broad range of products.18

The French government’s decision in February 2009 to provide $3.9 billion in preferential loans

to Renault and Peugeot-Citroen was similarly controversial due to buy-local or buy-national

concerns. As a condition for the loans, it was initially reported that the French government was

requiring these two automakers to source from French suppliers and to close factories in other

countries to ensure that car factories located in France keep operating. This apparent effort to

prevent outsourcing of French car production provoked a strong reaction from the Czech

Republic and Slovakia, countries where Peugeot-Citroen had factories. The Czech Republic

immediately called for an emergency European summit to protest France’s “protectionist plan”

and the European Commission (EC) agreed to investigate what appeared to be a violation the

EU’s single market rules.19 After weeks of discussion with the EC, French authorities pledged not

to implement measures that would breach the principles of the single market by requiring

manufacturing activities to be maintained in France. 20

Louis Uchitelle, “Buy America’ in Stimulus (but Good Luck With That),” New York Times, February 21, 2009.

Much of the actual impact will depend on how the various federal agencies interpret and administer the provision. In

the past, U.S. agencies have shown flexibility in interpreting specific definitions and vague language in a way that has

been consistent with U.S. international trade obligations.

Buy American provisions, in different forms, have been a significant response to the belief that U.S. products and

materials in some circumstances should be protected to some degree from foreign competition in order to obtain the

biggest bang for the buck from federal spending. Critics respond that federal spending would yield the biggest bang for

the buck by sourcing inputs and goods internationally.

The Economist, “The Next Great Wall: Buy Local Campaigns Raise Protectionist Barriers in Asia,” March 14, 2009.

Ben Hall and Peggy Holinger, “France Opts for 6 Billion Euro Car Bail-Out,” Financial Times, February 10, 2009.

Niki Tait, “Brussels and France Resolve Auto Dispute,” Financial Times, March 2, 2009.

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Medium Impact Scenario: WTO Rules Prove

Inadequate, Particularly for Sector-Specific

Assistance, and Trading System Is Weakened

Under this scenario, WTO rules and obligations are disregarded or prove ineffective and trade and

capital flows are diverted or misallocated. As a result, the global trading system could be

weakened over time.

This scenario involves sector specific financial assistance programs that governments around the

world have developed in response to the economic crisis. To date these programs have been

directed primarily to auto companies and banks. In the auto sector, almost every producing

country—the United States, Canada, Sweden, Germany, France, Australia, Argentina, Brazil,

South Korea, and China – has launched programs to aid producers or stimulate car sales. One

estimate totals these subsidies at $48 billion worldwide, including $17.4 billion thus far in the

United States. In the financial services sector, the WTO reports that 58 different programs worth

trillions of dollars have been announced by 26 countries in an effort to strengthen struggling

institutions.21 Much larger estimates have been provided independent researchers.22

These financial assistance programs have been devised and implemented in response to

extraordinary conditions. In the financial sector, as some major banks and institutions have

appeared on the edge of bankruptcy, government rescue packages and takeovers have increased in

scope and magnitude in an effort to avoid contagion or systematic risk—not by a desire to save

failing companies. The destruction of wealth in the financial sector has also hurt the real economy

and key industrial sectors, with large firms facing bankruptcy and large cut-backs in their labor

force.

While alleged subsidies contained in the rescue packages under some circumstances can improve

national economic performance and resource allocation, they may also be a vehicle for a kind of

murky protection and misallocation of resources. Whether any of the many different rescue

packages discriminate against foreign firms may also become an important consideration in

judging their impact on the trading system over time. 23

Auto Sector Rescue Programs

Slumping sales and employment have led the major auto producing countries to adopt or consider

a range of financial assistance programs. The measures vary in the degree to which they help

companies directly through loans and guarantees or indirectly through tax incentives and credits

(...continued)

Elisa Gamberoni and Richard Newfarmer, p. 3.

See Gary Hufbauer, Luca Rubini, and Yee Wong, “Swamped by Subsidies: Averting a U.S.-EU Trade War after the

Great Crisis,” Petersen Institute for International Economics Policy Note, July 24, 2009.

Simon J. Evenett and Frederic Jenny, “Bailouts: How to Discourage a Subsidies War,” In Richard Baldwin and

Simon Evenett, The Collapse of Global Trade: Murky Protectionism and the Crisis: Recommendations for the G20, A

VoxEU.org Publication, Centre for Economic Policy Research (CEPR), 2009.

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for buying new cars. The programs also differ to the extent they try to insure that only domestic

companies may benefit. Because many of these programs are still evolving or lack publiclyannounced details, the trade consequences are mostly speculative.

Some experts have argued that these assistance programs could be challenged as violations of the

subsidies rules under the WTO Agreement on Subsidies and Countervailing Measures (ASCM).

Under Article 3 of the ASCM, subsidies that are contingent upon export performance or upon the

use of domestic over imported goods are prohibited. Countries could also challenge another

country’s assistance programs on the grounds that loans were not provided on a commercial basis.

However, such a challenge would also need to prove that trade injury occurred (either “serious

prejudice” or a “threat of serious prejudice”) to car producers of other WTO signatories. This

could prove a difficult hurdle since several years of evidence are required to show that imports

have been displaced or impeded, prices have been suppressed or undercut, and imports have lost

market share. 24

As a practical matter, many observers think that WTO cases are unlikely to be filed. This is

because a country bringing the challenge could expect that its own auto industry assistance

program could be similarly challenged. Considerable cross-ownership of companies complicates

such filings as well. In addition, foreign carmakers operating in the United States, such as Toyota

and Honda, may be unwilling to support any WTO complaint given that they have received taxbreaks or subsidies to build factories from U.S. state governments.25

Foreign auto-assistance measures such as loans or loan guarantees could also be challenged under

each country’s countervailing duty (CVD) laws. 26 If successful, countervailing duties could be

imposed to offset any competitive advantages that an auto exporting company may have received

from its government. Such cases must meet similar tests to a challenge under the ASCM, but it is

the industry, rather than the government, that would bring a case. While it could be easier to

obtain an affirmative finding in a countervailing duty case because national authorities, not WTO

panels, make the injury determinations, these cases can take up to two to three years to resolve.

Assuming a duty eventually was imposed on imported autos, a car company in the targeted

country could file a similar case against the country that imposed the duty.27 If the CVD cases

proved successful, subsidies may stay in place and generate inefficient production over time, with

world trade in autos becoming more fragmented and protected. 28

Other concerns have been raised beyond trade diversion. One is that the various subsidy packages

being implemented around the world may not only strain national budgets, but also result in a

misallocation of resources. Firms that have access to the largest subsidies, under this perspective,

will be able to ride out the global economic downturn longer, raising concern that access to state

funds rather than commercial viability determines success.29

Inside U.S. Trade, “Possible U.S. Auto Bailout Could Face WTO Challenge By EU,” November 21, 2008.

Inside U.S. Trade, “Experts Say Auto Bailout Provides Illegal WTO Benefit, Risking Trade,” December 26, 2006

CVD laws are designed to offset to any unfair competitive advantage that foreign manufacturers or exporters may

enjoy over domestic producers as a result of foreign countervailable subsidies.

This challenge would have to be heard domestically and would not constitute tit for tat retaliation.

Claire Brunel and Gary Hufbauer, “Money for the Auto Industry: Consistent with WTO Rules,” Peterson Institute

for International Economics, Number PB09-4, February 2009, p. 10.

Simon J. Evenett and Frederic Jenny, p. 84.

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Another concern is that more industries will be encouraged to lobby for preferential financing,

encouraging a subsidy race in other sectors. For example, auto parts manufacturers in some

countries are now requesting assistance similar to what the automakers have received.

A final concern is that the auto industry could become isolated from WTO rules and disciplines,

similar to the situation in the shipbuilding and steel industries. Under this perspective, if countries

set up their own criteria for permissible subsidies with little regard for market conditions, the

world trading system could be weakened. 30

Financial Sector Rescue Programs

As the financial crisis has spread over the world, governments have launched extensive rescue

programs for troubled banks and other institutions, along with other monetary and fiscal policy

initiatives. For example, Iceland has nationalized all its major banks, and the United Kingdom has

taken a 68% share of the Royal Bank of Scotland. 31 The United States has taken control over

Fannie Mae and Freddie Mac and has extended billions of dollars to American International

Group (AIG) and Citigroup. 32 In U.S. cases, the government has received interest or equity stakes

in return for assistance with the subsidy element taking the form of more favorable terms and

financing than the companies could receive on the open market.

From a trade perspective, a concern is that some governments, like Britain, are directing their

banks with global operations to lend to domestic companies and citizens before providing loans to

foreigners. While these actions may not violate any international legal obligations (WTO rules on

subsidies pertain only to goods and disciplines on services do not regulate subsidies), this form of

financial protectionism may undermine the spirit of globalization that supports an open world

trading system. 33 At the same time, it can be noted that there has been substantial international

cooperation in the financial sphere among the key central banks of the world to deal with the

financial crisis.

High Impact Scenario: WTO Rules Are Violated,

Major Trade Conflicts Occur, And Trading System Is

Undermined

Under this scenario, WTO rules are violated or ignored and major trade conflicts occur. As a

result, the functioning and legitimacy of the world trading system is undermined.

This threat arises from the longstanding presence of highly skewed trade balances driven by

distorted global consumption and savings patterns—patterns that were an underlying cause of the

global economic downturn. High savings countries such as China, Japan and Germany produced

Claire Brunel and Gary Hufbauer, pp 9-10.

Landon Thomas, Jr., “Nationalized in All But Name: U.S. Move Echoes U.K. Share of RBS,” International Herald

Tribune, February 24, 2009, Internet edition.

Binyamin Appelbaum, “Government to Take Bigger Stake in Citigroup,” Washington Post, February 27, 2009.

Anthony Faiola, “Out of Gaps in Treaties, First Salvos of Trade War,” Washington Post, January 1, 2009.

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more than they consumed and had to rely on export-led growth to help keep their economies

growing. In the process, these three countries, plus the oil-exporting countries, experienced large

and growing current account surpluses.34 In 2008, the current account surpluses were estimated to

be around $2 trillion. 35 The United States, on the other hand, was a low savings country,

consuming much and having to borrow from the rest of the world to finance its investment needs.

Re-balancing Trade Flows

Overall trade imbalances are caused by different international savings and investment levels.

Much of the earnings of the current account surplus countries were recycled to U.S. capital

markets in the form of purchases of U.S. securities, helping make capital abundant and cheap in

the United States.36 Cheap and abundant capital, in turn, facilitated rising levels of U.S.

consumption and investment in housing.37 When U.S. consumption began to contract due to the

rapid decline in housing prices and the credit crisis, the pattern of global trade and financial flows

was no longer tenable.38

Policies that correct the imbalances and provide for more balanced growth in the next decade are

important both for a global economic recovery and an avoidance of an outbreak of trade conflict.

For current account deficit countries like the United States, where domestic spending exceeds

current production, spending must decline and savings rise. This can be achieved by a reduction

of consumption or investment (or a combination of both). 39 This, of course, is happening quickly

in the United States with rising unemployment and the credit crunch forcing drastic reductions in

domestic spending, particularly investment spending.40 The U.S. current account deficit has now

begun to fall, from 6% of GDP in 2006 to 4.5% in 2008, and possibly to 3% or even 2% in

2009.41

For the current account surplus countries, the rapid U.S. adjustment means that they will have to

sustain their growth more by stimulating domestic demand and less by net exports. For these

countries, where domestic spending is less than current production, domestic spending will need

The current account is the broadest measure of a country’s international transactions and includes trade in goods,

services, investments, and unilateral transfers. A surplus means that outflows of currency resulting from these

transactions are less than inflows, and a deficit means that outflows of currency resulting from these transactions

exceed inflows. Thus, a current account surplus country is a net exporter of investment funds to the rest of the world,

and a current account deficit country is a net importer or recipient of investment funds from the rest of the world.

The oil exporters generated $813 billion, China $399 billion or 9.5% of GDP, Germany $279 billion or 7.3% of

GDP, and Japan $194 billion or 4% of GDP. Cited in Martin Wolf, “Global Imbalances threaten the survival of liberal

trade,” Financial Times, December 2, 2008.

CRS Report RL34742, The Global Financial Crisis: Analysis and Policy Implications, coordinated by (name re

dacted).

U.S. Joint Economic Committee, “Chinese FX Interventions Caused International Imbalances, Contributed to U.S.

Housing Bubble,” by Robert O’Quinn, March 2008.

Robert Samuelson, “Three Crises in One,” Washington Post, January 26, 2009.

The other large current account deficit countries in descending order are Spain, the United Kingdom, France, Italy,

and Australia.

In the short-run, U.S. policy is attempting to boost spending and reduce savings in order to soften the downturn,

which paradoxically makes the goal of rebalancing more difficult in the long-run.

William R. Cline, “Trade, Finance, and the Global Recession,” p.8, and CRS Report RL33577, U.S. International

Trade: Trends and Forecasts, U.S. International Trade: Trends and Forecasts, By (name redacted), Shayerah Ilias, and

(name redacted), p.27.

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to rise. This, in turn, can be accomplished by increases in consumption, investment, or

government spending (or a combination of all three). While expansive government spending

programs or higher domestic consumption generally are the preferred path for the demand

increases to take place, sharp reductions in supply or production in current account surplus

countries are also possible. For example, China, the largest current account surplus country,

would have to be able to increase its consumption to an estimated 17% of GDP—a 40%

expansion—to offset the expected decline in U.S. consumption of 5% of GDP. It has been argued

that this would be a huge adjustment, and one that is perhaps beyond the ability of government

spending programs alone to stimulate. 42 Given the prominent role that China and the United

States play in the global imbalances, two flashpoints for any outbreak of protectionism can be

identified. The first involves the possibility that some countries could be perceived as “free

riders” in the international effort to increase global aggregate demand. The second relates to the

daunting task many countries, particularly China, Japan and Germany, face in shifting their

economies towards a greater reliance on domestic demand.

Dealing with Fiscal Stimulus “Free Riders”

This flashpoint stems from the need for an increase in global aggregate demand to rescue the

world economy from a continuing downward slide. To offset retrenchments in private

consumption, investment, and exports and to avoid the trade imbalances of the past, countries are

being urged to adopt coordinated fiscal stimulus packages. But some concerns have emerged in

the United States, which has adopted a $787 billion stimulus program, over the size and

composition of the plans and commitments of other G-20 countries.43 These concerns have been

directed primarily towards China and some European countries.44

China, which adopted a $585 billion stimulus program in November 2008, has been urged to

spend more given its huge holdings of foreign reserves, as well as to make its spending more

transparent. For example, it is unclear how much of the spending from China’s November

stimulus will be new expenditures versus already announced plans. Plus it is unclear how much of

the new spending will benefit industrial development and China’s exporting industries versus

consumers and domestic demand.45

France, the United Kingdom, and Germany are European countries that some observers believe

could be doing more to support world demand. According to IMF staff estimates (Table 1), their

stimulus packages as a percent of GDP tend to lag behind the U.S. and Chinese plans.

William R. Cline, and Martin Wolf, “Why Obama Must Mend A World Economy,” Financial Times, January 20,

2009.

The stimulus package, of course, is controversial in the United States.

Landon Thomas Jr. and Julia Werdigier, “No Clear Accord on Stimulus By Top 20 Industrial Nations,” New York

Times, March 15, 2009.

For an critical analysis suggesting that China’s stimulus program will do little to stimulate imports and domestic

consumption, see Derek Scissors, “China’s Stimulus Plan: Repackaged and Misdirected,” Heritage Foundation, Web

Memo #2128, November 10, 2008.

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Table 1. Stimulus Packages in Large Countries

(in percent of GDP)

2008

2009

2010

Total

United States

1.1

2.0

1.8

4.8

China

0.4

2.0

4.4

Germany

0.0

1.5

2.0

3.4

Canada

0.0

1.5

1.3

2.7

Japan

0.4

1.4

0.4

2.2

United Kingdom

0.2

1.4

-0.1

1.5

France

0.0

0.7

1.3

India

0.0

0.5

.......

0.5

Italy

0.0

0.2

0.1

0.3

Average

0.5

1.6

1.3

3.4

Source: International Monetary Fund, “The Size of the Fiscal Expansion: An Analysis for the Largest Countries,”

Fiscal Affairs Department, February 2009.

Notes: PPP GDP-weighted average.

These European countries counter that the relative size of various stimulus packages need to

account for spending on automatic stabilizers such as unemployment benefits, health care, and

training. Given that European countries tend to have larger such expenditures, an IMF analysis

taking these expenditures into account indicates much stronger contributions to global demand

are being made by Germany, the United Kingdom and Italy and a much weaker contribution

being made by China (see Table 2).

The IMF analysis also points out that due to already large public debt, some countries, like India,

Italy, and Japan, have less “fiscal space” or leeway to undertake expansionary fiscal policies. In

addition, some countries may be reluctant to undertake a fiscal expansion because the recession is

not yet deep for them. And some developing countries may be unable to use fiscal stimulus

because of fears that investors will lose confidence in their credit worthiness. Moreover, in every

polity, including the United States, there are stakeholders opposed to the use of expansionary

fiscal policy on the grounds that it either won’t work or will pass on to future generations debt

that current citizens should pay.

Table 2. Change in Overall Fiscal Balance

(in percent of GDP, relative to pre-crisis year 1/)

2008

2009

2010

Average

United States

-3.5

-5.7

-6.1

-5.1

Germany

....

-3.2

-4.4

-3.8

United Kingdom

-1.5

-4.6

-5.4

-3.8

Japan

-1.3

-3.7

-2.9

India

-2.6

-3.3

-2.2

-2.7

Canada

-0.9

-2.9

-3.2

-2.4

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2008

2009

2010

Average

China

-1.1

-3.0

-2.3

France

-0.6

-2.8

-3.6

-2.3

Italy

-1.1

-2.4

-2.8

-2.1

Source: International Monetary Fund, “The Size of the Fiscal Expansion: An Analysis for the Largest Countries.”

Notes: Pre-crisis year is 2007, except for Germany (2008).

While the United States is the world’s largest economy and perhaps the only one capable of

increasing global demand quickly, it is no longer large enough to be the single locomotive of the

world economy or the global consumer of last resort. Because stimulus in any country will boost

demand for both domestically produced goods and imports, the United States needs help from the

other trade surplus countries to spur its exports and economic growth at a time when its spending

and consumption are being diffused to help countries like China that are the world’s major

producers. Absent such help, some observers say protectionist pressures could grow in the United

States if the large U.S. stimulus increases U.S. indebtedness by far more than it increases demand

for U.S. goods. 46 Stated differently, if the U.S. economy after a year or two has little to show for

running expansionary policies and incurring increased public debt—for example, unemployment

remains high, there is little or no economic recovery, and the increased public debt begins to

weaken the value of the dollar47—the American public may ask why such a large share of U.S.

stimulus spending is leaking abroad and generating jobs in countries that have not stimulated their

own economies sufficiently to increase imports of U.S. products.48

The fiscal policies of the countries with large external surpluses, thus, are critical for the world

economy to recover in a timely manner and, over time become more balanced in terms of

spending patterns relative to production. In a deep recession, some analysts maintain that failure

of the current account surplus countries to increase domestic demand in a substantial manner is a

form of a beggar-thy-neighbor policy as they import demand from the rest of the world.

According to this perspective, current account surplus countries are also exporting their

unemployment to the rest of the world and “cannot be surprised if deficit countries even resort to

protectionist measures.”49 Interestingly, the United States was the world’s largest current account

surplus country in the 1930s, and, thus, was essentially in China’s position today.

United States and Current Account Surpluses in the 1930s

The trade and financial imbalances that were an underlying cause of today’s global economic crisis were in some ways

similar to the imbalances that characterized the world economy in the 1920s and 1930s. During this period, the

United States was the largest current account surplus country, financing the deficits of countries in Europe with

capital exports through bonds floated by foreign countries in New York. These capital exports allowed a number of

European countries to continue to run large deficits, while the United States continued expanding its industrial

capacity. The financial crisis of 1929-31 led to a collapse of the bond market, effectively cutting off funding for the

current account deficit countries and their ability to buy U.S. goods. This drop in foreign demand, in turn, forced the

Martin Wolf, “Global Imbalances Threaten the Survival of Liberal Trade,” Financial Times, December 2, 2008.

To date this has not happened as global investors continue to buy U.S. bonds, strengthening, rather than weakening,

the value of the dollar. See Peter S. Goodman, “A Rising Dollar Lifts the U.S. but Adds to the Crisis Abroad,” New

York Times, March 9, 2009.

Michael Pettis, “Would A Trade War Solve the Problem of Excess Capacity,” Emerging Capital Markets Economic

Monitor, November 17, 2008.

Martin Wolf, “Why Saving the World Economy Should Be Affordable,” Financial Times, March 18. 2009.

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United States to either increase domestic demand or cut back on domestic production. But instead of running an

expansionary fiscal policy (increasing domestic demand), the United States cut back spending and then in 1930

enacted the Smoot-Hawley Tariff. The trade deficit nations retaliated, raised their own tariffs, and world trade

collapsed. This forced most of the global adjustment (deep production cuts and high unemployment) on the United

States and other current account surplus countries in Latin America. Deficit countries such as Germany, Italy, and

Spain suffered much less. (Most economists think that the main reason the Depression was milder in some countries

was due to the fact that they abandoned the gold standard more quickly than the United States, thereby giving them

greater flexibility to run expansionary fiscal policies). One tentative implication is that if today’s crisis were to lead to

a trade war, all countries would be worse off, but surplus countries, especially China, would suffer the most. Source:

Michael Pettis, “Asia Faces a Tough 2009 as Output Decreases,” Financial Times, December 15, 2008, and Martin

Wolf, “What Obama Should Tell the Leaders of the Group of 20,” Financial Times, February 25, 2009.

Current Account Surplus Countries – Transitioning To DomesticLed Growth

A second flashpoint relates to the task that many countries, particularly China, Japan, and

Germany, face in shifting their economies towards greater reliance on domestic demand – that is

producing more for themselves rather than exporting to the rest of the world. Stated differently,

these countries need to reduce their heavy reliance on exports by reorienting their economies

more towards domestic consumption and investment. But for a variety of cultural, political and

economic reasons, the transition may be extremely difficult.

In the case of China, efforts to increase consumption and domestic demand will not be easy or

quick. Chinese households, for example, have one of the highest savings rates in the world (up to

25%). Chinese families, especially those in rural areas, save at such high rates because they

receive little government support with education costs, medical care, and retirement. The average

hospital stay can cost the equivalent of two years wages for the average Chinese worker. In

addition, some of the items Chinese people may want to consume are not necessarily the goods

being produced for export. Some production, thus, may need to be re-engineered and some

workers retrained and re-deployed because China’s economy biases the economy towards exports

rather than domestic consumption. Yet, requests from factory managers to make goods for the

domestic market may take up to two years for all the necessary approvals to be made. Moreover,

lending of the Chinese banking system continues to be biased towards boosting manufacturing

and infrastructure projects, not consumer spending.50

Japan’s longstanding export dependence has been fueled by a mind-set of export or perish. Based

on a shortage of natural resources, most Japanese have adopted a mercantilist perspective tied to

the notion that Japan’s power is dependent upon exporting manufactured goods in exchange for

raw materials and generating trade surpluses with the rest of the world. This mind-set has been

bolstered by a banking system that places priority on allocating credit to big exporting companies.

Given that Japan’s economy declined by 3% in the last quarter of 2008, there may be added

urgency for the government to undertake additional spending programs. For such spending to

Keith Bradsher, “As Trade Slows, China Rethinks Its Growth Strategy,” New York Times, January 1, 2009, and

Steven Pearlstein, “Asia, Europe Find Their Supply Chains Yanked, Beware the Backlash,” Washington Post, February

20, 2009.

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generate increases in private demand, much of the new money would have to be channeled to

education, housing, and improving Japan’s health care infrastructure. Hundreds of thousands of

small- and medium-sized businesses, which employ two-thirds of Japan’s workforce, stand to

benefit from a redirection of credit.51 At the same time, Japan has had interest rates near zero for

several years and still has been unable to stimulate domestic demand.

Germany’s economy is heavily dependent on the world economy for its growth as well. It is the

world’s largest exporter of goods and 25% of its jobs are export dependent. Moreover, it has

objected to implementing larger spending programs on historical and structural grounds. Savings

were wiped out by policies that created hyperinflation in the 1920s and German economic policy,

ever since the end of World War II, has emphasized stability over economic growth. Opposition to

additional spending, thus, is rooted in both fears of its inflationary impact, plus concerns that

additional debt could be a drag on growth in the future. Because the economic crisis to date has

had few palpable effects on ordinary Germans (except for their automobile industry), efforts to

induce already high saving Germans to spend any extra cash could prove difficult. 52

Assuming the transition to domestic-led growth by China takes years to accomplish, a major

concern is that the current account surplus countries could try to avoid massive factory closings

by resorting to tariff and trade policies designed to export their overcapacity to the rest of the

world. This concern was highlighted by one Chinese trade official who recently stated that “China

will resort to tariff and trade policies to facilitate exports of labor-intensive and core technologysupported industries.”53

Providing export subsidies, increasing import tariffs, and depreciating a currency were the tools

most often utilized in the 1930s to boost exports. As the history of this period demonstrated,

countries cannot all export their way to growth unless they collectively act to boost imports.

Without an import boost, trade tensions will likely escalate and possibly lead to serious trade

conflicts.

Policy Challenges for Congress

The global economic downturn is deep and broad. Job cuts and declining levels of economic

activity are affecting countries around the globe. Even before the crisis hit, there had been an

erosion of public support for trade and globalization in many countries, including the United

States. As a result, increased pressures for protection should not be unexpected.

Policymakers and Members of Congress, thus, find themselves situated between a rock and a hard

place. On the one hand, they are under increased pressure to respond to pleas from voters to take

action that will alleviate immediate distress. On the other hand, they are cognizant of the need to

keep markets open and trade and investment flowing. How to balance considerations of

constituent requests for relief—national and political demands—with recognition of the growing

imperatives of an integrated global economy—which requires international cooperation—is an

overarching dilemma.

David Pilling, “Japan’s New Carry Trade, The Handbag,” Financial Times, January 22, 2009.

Carter Dougherty and Judy Dempsey, “Leary of Debt, Germany Shuns a Spending Spree,” Financial Times, March

10, 2009.

Keith Bradsher, “As Trade Slows, China Rethinks its Growth Strategy,” New York Times, January 9, 2009.

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In this context, three broad policy challenges can be derived from the analysis presented in this

report. The first deals with international coordination and surveillance of fiscal stimulus

programs. The second relates to multilateral surveillance of trade pressures and barriers adopted

during this crisis. The third pertains to the management of U.S. trade relations, particularly as it

relates to trade with China and other current account surplus countries.

Coordination and Surveillance of Stimulus Programs

Most economists maintain that governments need to place high priority on bolstering aggregate

demand in an effort to arrest deteriorating economic conditions around the world. Expansionary

economic policies, via tax cuts, increased public spending, and budget deficits, are one way to get

national and global economic activity moving again. In addition to its beneficial impact on

bolstering global demand and addressing the recession, such policies can also be channeled to

alleviating some of the losses (jobs and health care benefits) workers are experiencing from the

economic downturn—losses that often intensify protectionist pressures.

Expansionary policies, including monetary policies, are not universally supported. Some critics

worry about consequences of larger public debt. Many European governments maintain that

financial regulatory reforms are a more important priority.54 Other critics believe that it is more

efficient to allow markets to adjust without government interference. And still others maintain

that expansionary policies are unlikely to prove sufficient in achieving long-term rebalancing of

domestic demand.

The current account surplus countries generally are in the best position to run expansionary fiscal

policies.55 Such policies are also necessary if current account deficit countries, which are trying to

save more than before, are able to improve their net export position, a development critical for

economic recovery. Moreover, the United States, the world’s largest deficit country, will be hard

pressed to employ expansionary economic policies for many years without adverse consequences

for the value of the dollar and its overall debt position. In the absence of help from these

countries, political frustration in the United States could grow if it is perceived that other

countries are shirking their global economic responsibilities.

Under these circumstances, it could prove helpful if policymakers and Members of Congress had

available an objective analysis of the extent to which all major countries are pursuing

expansionary policies, given their differential circumstances. Such public information could be

used in discussions with their counterparts (in all major countries) to do their “fair” share in

keeping the world economy moving forward and as a way to hold everyone to account. The

analysis could include targets for demand growth and monetary policy, perhaps differentiated by

individual country circumstances. U.S. Treasury Secretary Tim Geithner has called for each G20

country to set a spending target equaling 2% of aggregate GDP for 2009 and 2010, and for the

Edward Cody, “E.U. Pushes Strict Regulations Over More Stimulus Spending,” Washington Post, March 21, 2009.

The IMF analysis relies on the size of a country’s output gap and the amount of “fiscal space” as determined by

levels of deficits, public debt, and interest rates as key determinants of the magnitude of a country’s overall fiscal

expansion. See IMF Staff Analysis, pp. 3-4.

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IMF to monitor progress towards that goal.56 Some economists are calling for a more ambitious

3% spending target given the deterioration in the outlook for world economic growth. 57

The IMF’s Fiscal Affairs Department has produced an analysis that addresses this objective in

part. Whether such an analysis or macroeconomic scorecard could benefit from a formal mandate

from the leadership of the IMF or the G-20 countries is something that could be considered.58

Multilateral Surveillance of Trade Barriers

The WTO Secretariat has begun tracking trade and trade-related measures taken in the context of

the current economic crisis. These efforts are designed to bolster policymakers’ resolve to reject

calls for protection by making the measures transparent and public. The idea is that by raising

public awareness of what barriers are being imposed, countries may realize that they are not

acting alone and that their restrictive measures could be emulated quickly by their trading

partners.59

An initial concern about the WTO effort is that the data have been drawn primarily from

secondary sources such as press reports. Member governments currently are obliged to notify the

WTO about changes in applied tariffs and subsidies only on an annual basis. For the tracking

system to become more useful and relevant, there may be a need for greater involvement of

member governments in providing information on new measures adopted. Along with this

information, the member country could be asked to provide some justification for taking the

action, along with a promise to remove the new protection within a certain period of time.

It also has been suggested that an inventory of new protective measures, many of which are likely

to be WTO-consistent or legal, could also prove useful once the global recession ends. Much of

the damage from the higher tariffs of the 1930s was that they remained in place for decades.

Thus, devising a plan to remove the barriers induced during the economic crisis arguably could

also be contemplated.60

Management of U.S. Trade Relations

The global economic downturn creates numerous challenges for Congress and the President in

managing U.S. trade relations. Based on a longstanding division of responsibilities -- Congress’s

constitutional responsibility to “regulate foreign commerce” and presidential responsibility to

negotiate with foreign countries—the legislative and executive branches of government are

challenged to consult and cooperative closely. This is true on a range of issues, including

Alan Beattie, “IMF Firepower to Triple,” Financial Times, March 12, 2009.

C. Fred Bergsten, “Needed: A Global Response to the Global Economic and Financial Crisis,” Testimony before the

Subcommittee on Terrorism, Nonproliferation and Trade, Committee on Foreign Affairs, U.S. House of

Representatives, March 12, 2009.

Martin Wolf, “What Obama Should Tell the Leaders of the Group of 20,” Financial Times, February 25, 2009.

Richard Baldwin, “The Crisis and Protectionism: History Doesn’t Repeat Itself, But Sometimes It Rhymes,” In

Richard Baldwin and Simon Evenett, p. 33.

Kevin H. O’Rourke, “Engage Multilateral Institutions In Solutions To Today’s Problems,” In Richard Baldwin and

Simon Everett, p. 56.

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constituent requests for protection, facilitating the adjustment of current account surplus

countries, and formulating trade liberalization priorities.

Responding to Requests for Protection

As constituent requests for protection are likely to increase as the recession persists, Congress is

faced with balancing the political imperative of being responsive to constituent needs against U.S.

international obligations under the WTO. On the one hand, current WTO and other international

trade obligations do grant member countries some leeway to raise tariffs, protect domestic

producers for limited periods of time, and provide domestic preferences or financial assistance to

specific sectors under certain circumstances. Such protection provides a political safety valve for

absorbing the political pressures associated with efforts of companies and workers to adjust to

increased competition. On the other, protection that falls outside existing international trade

obligations has less legitimacy. Under these circumstances, the policy challenge is not necessarily

protection versus no protection, but under what circumstances might protection be appropriate

and for how long. As the history of U.S. trade policy suggests, providing no protection when it

may be warranted can often backfire, generating support for greater and perhaps excessive

protection at a later date.61

Dealing with Current Account Surplus Countries

How best to facilitate a more rapid adjustment of current account surplus countries is a second

large challenge for Congress and the Executive Branch. Legislative initiatives threatening trade

sanctions, for example, are likely to hurt both sides if imposed, but they could also provide the

President with useful leverage in pressing counterparts in Europe and Asia to do more in terms of

boosting aggregate demand.

In an ideal world, international cooperation and institutions are a better way to encourage the

current account surplus countries to undertake necessary structural changes and to head off

protectionist actions. As part of any agreement, a realistic amount of time may be required for

these countries to make the necessary adjustments. In return for open markets in the deficit

countries while these changes are being made, the surplus countries could agree not to employ

predatory trade policies.62

Problems and possible conflict likely will occur, however, if it becomes clear that current account

surplus countries are trying to export their overcapacity and unemployment to the United States

by manipulating their exchange rate, subsidizing exports, or blocking imports.63 Challenging

these practices through the available international channels may be less politically contentious

and more effective than unilateral actions, but such challenges can often take years to be resolved.

In the meantime, trade can take on a zero sum game appearance as the choice between preserving

jobs at home or abroad becomes more stark.

(name redacted) and Alfred Reifman, “U.S. Trade Policy: Congress Sends A Message,” In Current U.S. Trade

Policy: Analysis, Agenda, and Administration, NBER Conference Report, Robert E. Baldwin and J. David Richardson,

editors, 1986.

Michael Pettis, “This Is Not the Time to Attack China,” Financial Times, February 18, 2009.

It may be hard for the United States to induce China to appreciate its currency while inducing it also to buy U.S. debt

since China’s undervalued currency is the chief reason why China has to buy that debt.

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Considering the Role of Trade Liberalization

A third challenge for the Congress and Administration involves weighing the role that trade

liberalizing agreements can play during the current recession. On the one hand, in a time of great

economic uncertainty and retrenchment, many stakeholders may prefer to preserve benefits

(subsidies or tariffs) that they already have. This is because trade liberalization rests on a

willingness to swap current benefits derived by protection or subsidies in return for future

benefits offered by promises of greater access to foreign markets that are growing. On the other

hand, trade liberalization, by cutting protection, may provide an effective economic stimulus and,

in the process, appear more attractive. As the economic downturn has placed added demands on

the use of public funds to stimulate economic activity, conducting negotiations that free up public

funds through the reduction of subsidies may become more appealing.

One key practical question is whether the global economic downturn could cast the long-stalled

Doha Round of multilateral negotiations in a new light. Some observers believe that some WTO

members may reevaluate the basis for their opposition to some version of the agreement proposed

in July 2008 based on today’s radically different economic environment. This is, in part, due to

the fact that shrinking trade flows have highlighted the importance of open markets for economic

development among a broad group of countries, and in the process, increased the value of

concessions left on the negotiating table last year. This group includes the export-dependent

countries in Asia countries and India. Other observers think that the kind of political leadership

that is necessary to push trade liberalization will be in short supply and difficult to secure in a

time of a global recession and increased protectionist pressures. Moreover, the U.S. business

community is not enthusiastic about the package of market opening concessions that was

proposed last July, thus providing little stakeholder support in the United States for an effort to

reach a partial Doha agreement.

Author Contact Information

(name redacted)

Specialist in International Trade and Finance

#redacted#@crs.loc.gov, 7-....

Acknowledgments

The author wishes to thank the following CRS colleagues who provided helpful suggestions and comments:

(name redacted), Steve Cooney, William Cooper, (name redacted), Craig Elwell, Ian Fergusson, Jeanne

Grimmett, (name redacted), Shayerah Ilias, (name redacted), Michael Martin, Wayne Morrison, Dick Nanto,

and Jonathan Sanford.

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