Protectionism is worse than the World Bank thinks

By Phil Levy

In the midst of a global economic storm, we are seeing capable hands jumping in to help, no matter what their formal roles. On the trade front, this morning’s Washington Post reports on the latest World Bank study.

At least 17 of the 20 major nations that vowed at a November summit to avoid protectionist steps that could spark a global trade war have violated that promise, with countries from Russia to the United States to China enacting measures aimed at limiting the flow of imported goods…

The World Bank report is right, but it is worth reading between the lines. First, it’s unusual that it is the Bank saying this, not the World Trade Organization. The WTO, under the leadership of Pascal Lamy, has warned against rising protectionism, but there has been little of the "naming and shaming" that World Bank President Robert B. Zoellick is now doing. This probably reflects both Zoellick’s expertise as a former U.S. Trade Representative and the relative strength of the Bank as an institution.

If anything, the report may be a bit too optimistic. It treats countries’ WTO commitments as a firm barrier against rising protectionist sentiment. I argued last week that this barrier is not as firm as it seems. Those barriers also leave room for what Fred Bergsten of the Peterson Institute has called "legal protectionism." A developing country might well have a 10 percent tariff, but a WTO commitment only to remain below 25 percent.  Such a country could double its tariff without officially transgressing. The United States ultimately did something like this with its Buy America provision in the stimulus bill, applying protectionist policies only to those countries that had not signed the WTO’s government procurement agreement. The measures are no less protectionist, but they don’t provide grounds for a WTO dispute.

And even Zoellick and his crew are pulling their punches a little bit. By arguing that protectionism has spread among 17 of the group of 20, the criticism is diffuse rather than focused. That’s probably good diplomacy, but the Bank’s trade experts cannot really believe that Argentinean malfeasance has the same impact as flagging U.S. commitment to the trading system. The Post notes that this report comes in the wake of Mexico’s trade retaliation for U.S. withdrawal of trucking access promised under NAFTA.

This all follows the highly unusual appearance of Fed Chairman Ben Bernanke on CBS’ "60 Minutes" this weekend. It’s not normally the role of the nation’s top banker to offer fireside chats, but Bernanke defended the Administration’s approach to financial bailouts with a clarity that has sometimes been lacking from Administration statements. Whether it’s wise to show up the boss as your term is about to expire is another question.