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Is Protectionism a Threat to the World Economy?
Summary:

From News, page 7, issue no. 407, February 23, 2009
Translated by Tang Tang
Original article:
[Chinese]

As the global economic slowdown deepened, a new wave of economic nationalism and trade protectionism has surfaced. In light of this trend, the EO interviewed Long Guoqiang, director of foreign economic relations research for China's State Council, Liu Yuanchun, vice-president of the School of Economics at Renmin University, and Zhang Yansheng, head of the National Development and Reform Commission's research center on foreign economic relations.

EO: How should we understand protectionist policy in Europe and America? Do these policies reflect rising protectionism?

Liu Yuanchun: There is no doubt that trade protectionism has been on the rise. Every economic crisis is associated with trade or investment protectionism. Although nowadays countries rely on one another to a greater extent and have set up clearer rules, political and social factors still far more outweigh the economic incentives. This is because protectionism is linked to nationalism. Under the North American and European political systems, this nationalism would easily be vented through trade protectionism.

Zhang Yansheng: the current wave of protectionism is both cyclic and structural. Some countries refuse to shoulder responsibilities under the current crisis due to the lack of an efficient global governance system. Thus they are motivated to transfer the crisis and impose the rebalancing costs on other countries, and trade protectionism is just one means toward this end.

Long Guoqiang: Trade protectionism is indeed rising. Faced with the global crisis, many countries have adopted unconventional measures, including trade protectionism. But I think what we're seeing in the West will be short-term.

EO: These measures have drawn flak from many other countries. To what extent do you think it will lead to a global protectionism war?

Long Guoqiang: I don't think we'll end up with a trade war. Countries mostly adopt protectionist measures within the WTO framework. There are two reasons--the first is that all the countries have something in common in prosting protectionism, second, countries have emphasized corporation at recent top-level meetings. If some country dared to really put up protectionist barriers, it would open up a hornets' nest of criticism against them.

Second, trade retaliation forces parties to weigh the pros and cons before taking protectionist measures. So while protectionism is sure to rise, it would not have a big impact.

Periodic trade disputes will be unavoidable in the near future, but there would be little possibility of trade conflicts. I treat frictional trade rhetoric as a part of the bilateral negotiation process. It just becomes more intense during times of crisis.

EO: For example, take American's "buy American", will it help the relevant industries? Is there any country that can benefit from trade protectionism?

Long Guoqiang: At the national level, if a trade war breaks out, losses outweigh the gains. Many industries in the U.S., such as the silicon chip, civil aviation, and agriculture industries are cross-border, and thus vulnerable to trade retaliation. Only  industries with a strong domestic market would benefit.

Obama's "buy American" policy shamefully goes against the US track record of being a pioneer for free trade. But we also need to look at what extent this will be implemented, and if indeed implemented, if it violates the non-discrimination principle set out in the WTO, and which all WTO members would have the right to sue over.

EO: if we view the protectionism as the crisis' fall-out, what impact will it have on the global economy?

Zhang Yansheng: Every country would turn into a closed economic body if all countries only bought their own products. We would face the crisis in isolation and be defeated.

For example, when a  village is flooded, what should we do? Team up to overcome it or run for our lives? The latter one will surely lead to individual destroy, no one will be saved. No one benefits from the trade protectionism, that is why we need to be against it unequivocally.

Liu Yuanchun: Trade protectionism would surely hurt the economies to a greater extent, and then pass the crisis on.

When reviewing the big recession in the 30th of last century, all admit that the Smoot-Hawley act, which tried to transfer the crisis to other countries, led to international trade conflicts, harmed international trade, and exacerbated every country's recession.

EO: As the world's second largest trade country, what does at trade war mean to China?

Liu Yuanchun: A trade war will do much harm to China--on the one side, China relies heavily on international trade, thus the overall economy will suffer greatly. On the other, China's social system is very fragile, the ability to cushion itself has not been fleshed out. So we must do our best to avoid the trade conflicts tactically.

EO: Is the current WTO framework suffice to stem the spread of protectionism around the world? Is it necessary to set up a new framework for cooperation?

Liu Yuanchun: Given the Doha round's long delay, the WTO is currently stuck, and in fact there are many loopholes in it. The G20, G8, and G2 are good communication platforms but lack regulatory mechanisms. The WTO has regulation power but with many exceptions. I think it is hard to rely totally on these systems to resolve potential trade conflicts.

In dealing with everyday trade conflicts, bilateral negotiation seem to be a better option, after which we proceed to regional trade contracts, and finally, multilateral negotiations based on, say, the WTO.

Long Guoqiang: The problem with the WTO is the lack of regulatory power, but at the same time it would be unnecessary and unrealistic to create another set of rules to settle disputes. I think we should strengthen WTO regulations, according to which penalties can be imposed on those who violate them.

EO: How would China deal with trade friction in order to avoid serious trade conflicts?

Long Guoqiang: China needs to have a plan B. First, China needs to advocate anti-protectionism unequivocally at all suitable opportunities, including at WTO, G20. I expected G20 in April would put anti-protectionism on top of its agenda with more emphasize and more detailed measures on stemming protectionism. On the other hand, China needs to prepare a trade retaliation blacklist and announce that it will act if relevant countries adopt protectionism measures.

Zhang Yansheng: Plugging the loopholes in global governance is the key to stemming trade protectionism. All countries are now concerned about international monetary system reform, while international trade, investment also need reform. Regarding the policies adopted by India against China, we need to adopt countermeasures. According to game theory, this is the most efficient way to prevent trade protection.

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