Protectionism — The Dog That Didn’t Bark

Two years ago, as the U.S. economy fell into recession, I was asked by a reporter about the likelihood of a new wave of trade protectionism breaking out. Not a chance, I predicted confidently, though I was careful to add: "If U.S. unemployment gets to 10%, then all bets are off. But we're a long way from that."

Not so long, it turns out. Since then, unemployment in the United States has doubled, and the official rate is near 10%. Yet, astonishingly, there has still been no surge in trade protection in the United States or anywhere else.

A definitive report released in March 2010 by the World Trade Organization found that in the past six months the number of new import-restricting measures by G20 countries, which represent nearly 90% of the world's economy, had actually slowed significantly from the previous six months. Such measures are affecting less than half a percent of world imports.

Trade protectionism has been the dog that didn't bark in the current crisis. In the past, soaring rates of unemployment were inevitably accompanied by new trade-restricting measures aimed at protecting jobs that might be threatened by imports.

The cautionary story of the Great Depression is well-known, but even the deep recession of the early 1980s triggered an array of import restrictions that restrained trade growth for a decade.

What is different this time around? The biggest change is the existence of the often-maligned WTO, which is proving itself to be the most robust institution of international cooperation yet constructed.

Through its dispute settlement procedures, the WTO has been the vehicle for enforcing a set of agreed rules that leave its 153 members with very little room to restrict imports through traditional trade measures. Even in the depths of the current crisis, countries have shown themselves unwilling to disregard those rules.

These restraints have, appropriately, had the largest impact on the biggest economies. In the 1980s, when adherence to trade rules was strictly voluntary, the United States and Europe were able to pressure Japan into limiting its exports of steel, cars and semiconductors simply by threatening to impose tariffs or quotas on imports. Such "gray market" measures are no longer permitted under WTO rules.

Small and medium-sized countries have also grown more aggressive in using the WTO rules to their advantage. In early March 2010, Brazil threatened to raise tariffs on about $560 million worth of imported U.S. goods — unless Washington moves to comply with a WTO ruling that it end illegal subsidies to U.S. cotton farmers.

The Obama Administration is scrambling to try to find some way to stave off the retaliation. Two decades ago, before the creation of the WTO, the United States would simply have threatened to hit back — and Brazil would have climbed down.

The second reason protectionism has been so muted this time around is the increasing globalization of business. As a result, very few large companies still have an undivided interest in trade protection.

Global sourcing and rising foreign investment mean that the companies with the most political influence would also be the losers from protectionist measures.

In the United States, except for the steel industry, what's left of the textile industry and a handful of specialty agricultural producers, there is simply no longer a business lobby for restricting imports.

Finally, publics in most of the world have lost their appetite for trade protection. A recent global poll by Pew in two dozen countries surprisingly found that attitudes toward trade were slightly more positive in most places than they were in 2007, before the recession hit.

The open trade enthusiasts predictably include Brazil, India and China, but even Americans were slightly more positive, with 65% saying in 2009 trade was a good thing compared with 59% in 2007.

It is certainly possible to be too sanguine. Governments have become more creative at finding ways to distort markets in their favor without running afoul of WTO rules. China has been particularly adept at this, using an array of industrial subsidies and import-restricting standards while intervening to maintain an undervalued currency.

The United States imposed "Buy America" restrictions on government projects funded by stimulus spending, but wrote the regulations carefully to remain in compliance with the WTO's weak provisions on government procurement.

And some countries may decide to live with WTO-sanctioned trade retaliation rather than eliminating protectionist measures, which could result in a downward spiral of market closing.

And the United States has yet to meet its trade commitments to open its roads to Mexican trucks, for example, despite Mexico imposing more than $2 billion in retaliatory tariffs last year.

The big story is clear, however. Global rules to promote open trade are proving remarkably robust in the face of the worst economic downturn in 80 years. Perhaps if unemployment remains so stubbornly high, countries could still decide to reverse course. But this time, I'm going to stick with my initial prediction. Not a chance.