The G20 summit - London calling

Mar 26th 2009 From The Economist print edition Trade is collapsing and protectionism is on the rise. Time for the G20 to get going THE first task for the leaders of the Group of 20, who will meet in London on April 2nd, will be to do no harm. Don’t fall out over whether Germany and China are spending enough public money to get the world economy going. Let’s not have a row over how to run the IMF. And spare us a tirade against “market fundamentalism”. The second task is to do something useful. Ideally, the G20 would boost government spending, partly by giving the IMF more money. And it would take five minutes to shunt the re-regulation of finance into groups that can deliberate now and act later, when there is more time and less ire: the last thing to fear from Wall Street today is irrational exuberance. It is the third task that is being neglected. Publicly, the G20’s leaders would be shocked, shocked if anyone were to turn against open markets. Even so, trade is collapsing and an insidious protectionism is on the rise (see article). As the storm rages, the London summit looks like offering nothing but pieties. The trading system needs more than that. Do as I say, not as I do On March 23rd the World Trade Organisation (WTO) predicted that global trade will plunge by 9% this year—the steepest drop since the second world war. Japan’s exports in February were half what they had been a year earlier; yet its imports had fallen so much that the country still recorded a surplus. This collapse is partly due to globalisation. The days are gone when something was made in one country and exported. Products now contain parts from all over the world. Trade statistics look at value, not value-added, so they include a lot of double counting as parts move across borders and back. When the economy shrinks, trade will shrink faster. But that is not the full story. The World Bank says that, since the G20 leaders last met in November in Washington, DC, 17 of their countries have restricted trade. Some have raised tariffs, as Russia did on second-hand cars and India did on steel. Citing safety, China has banned imports of Irish pork and Italian brandy. Across the world, there has been a surge in actions against “dumping”—the sale of exports, supposedly at a loss, in order to undermine the competition. Governments everywhere are favouring locally made goods. Some take comfort from the world’s interdependency. Producers in Brazil rejected protection, because Brazilian tariffs would have raised their own prices. Neither of France’s carmakers wanted to have to guarantee jobs at home as a condition for state aid, as President Nicolas Sarkozy had stipulated. But interdependency is a slender reed. Plenty of people argued against the Smoot-Hawley bill, which raised tariffs at the onset of the Depression. One danger today is that, under WTO rules, some countries have scope to put tariffs up without breaching their legal limits. Countries can indeed justify protection using safety or dumping, even if that breaks the spirit of open markets; and when protection reaches some (unknown) level, global supply chains will break down. If that happens, they will not be rebuilt for many years. After they met in Washington last November, G20 leaders said that they had united to support open markets. But promises alone will no longer do. In London they need to limit the scope for tariff increases—ideally by finishing the Doha round of trade talks; they should agree to put aside anti-dumping actions and the rest of the apparatus of legal trade protection; and should ensure that subsidies do not discriminate against foreign firms. Leaders were counting on trade to be the straightforward part of the summit, but if they think fighting protectionism is easy work, then they aren’t doing enough.