World Economic Giants Using “Stealth Protectionism”: Study

Last Updated: 23, October 2012

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Some of the world’s largest economies, particularly the European Union and Japan, have resorted to less tansparent policy instruments, also referred to as murky or stealth protectionism, in a bid to protect their economies against foreign competition.

Since the onset of the global financial crisis, a study has found that governments have been “selectively subsidising” local firms – a clear violation of, albeit weak, World Trade Organisation rules.

In the study, the authors surveyed Brazil, China, the European Union, South Korea, Japan, Russia and the United States and found that these governments had not only tried to protect their economies against foreign competition, but engaged in a process of “selective subsidisation” and often “picked winners” from certain industries, leaving the other firms to bear the brunt of the crisis.

“Considerable discrimination among firms has been an important feature of crisis-era policy choice,” said the study which examined 869 non-macroeconomic trade policies from the period of November 2008 to May 2012.

Vinod K. Aggarwal and Simon J Evenett, authors of the study which will be published in the Oxford Review of Economic Policy, explained the discrimination mechanism:

[quote] The governments behind these subsidies weren’t only interested in stabilizing their firms. They were also interested in restoring economic growth. In addition to across-the-board monetary and fiscal policy measures, many of them targeted specific sectors and even specific firms as growth poles. This amounts to a revival of the industrial policy that has been pooh-poohed for decades in the US, the UK, and much of the English-speaking world. [/quote]

At the start of the period under review, the world’s largest economies had vowed not to resort to protectionism at a G20 crisis summit in Washington.

Aggarwal and Evenett said trade disputes had begun to crop up over crisis-era industrial policies affecting auto parts, wind power, and solar panels, but said those formal disputes could represent “only the tip of the iceberg.”

“At the current rate, 2012 will easily see more disputes than in the two previous years combined,” they said.

In their findings, the European Union and Japan had the most “selective” and discriminatory trade policies, with more than two-thirds of its policies targeted at “selected” firms in the domestic market.

According to the study, economies that resorted to most discrimination tended to reply most on policies where the WTO rules were the weakest, such as outright bailouts, trade finance and investment incentives – in 84 percent of the cases in the EU.

Meanwhile, China engages in significant discrimination against foreign firms rather than selectivity among its own firms.

Brazil, on the other hand, had the highest percentage of measures that benefit foreign firms or at least policies that do not harm foreign competitors.

The authors said:

[quote] Here’s the bottom line for managers: don’t count on WTO rules to protect your interests. It is clear that, during the crisis era, policy choice has sought to circumvent the stricter WTO rules … Don’t be misled by the avowed rejections of protectionism. Just because tariffs aren’t being raised across the board, it doesn’t mean firms’ overseas commercial interests are being treated without prejudice. Policymakers’ commitment to the level playing field has been tested during the crisis era and found wanting—and managers must now live with the consequences. [/quote]

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