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Protectionism is a shady business

Some countries are clearly introducing rules by stealth that favour local businesses, believes an international trade policy expert. 1,200 trade barriers now threaten Danish businesses.
An increasing number of growth economies set up restrictions and rules for foreign businesses in order to favour home-grown industry.

Publiceret: 08.09.2016
Af Rikke Brøndum mail

There is no shortage of praise when world leaders sign important free trade agreements as the EU did, for example, with Ukraine in 2012 and with South Korea in 2009.

What garners much less interest is that some of the largest countries in the world are increasingly sneaking in trade barriers by the backdoor.

A survey carried out by the Confederation of Danish Industry, based on data obtained from the World Trade Organisation, shows that while 324 trade restrictions were in place in the world’s 20 largest economies in 2010, the number of barriers to free trade had topped 1,196 by May this year. 1,200 trade barriers now threaten Danish businesses.

“We are seeing again and again that countries are introducing rules by stealth that favour local businesses,” says Simon Evenett, professor at the University of St Gallen in Switzerland. He is also associated with Global Trade Alert, an independent think tank.

Growth economies protect local industry


One of the most dramatic examples of this trend could be seen recently with the American technology group General Electric who want to move production to those countries that purchase the most – precisely in order to avoid trade barriers.

An increasing number of growth economies are putting restrictions in place for foreign companies. For example, the Brazilian government has decided that only businesses that are headquartered in Brazil are eligible for funding for solar cell projects from the Brazilian Development Bank (BNDES).

The Brazilian government has also decided that by 2020 60% of all solar cell components in Brazil must have been produced locally.

Protectionism prompts relocation


According to the European Commission, China, which is the country that has introduced the highest numbers of trade barriers, has completely shut the country to foreign investment in several sectors.

Often countries point to national security interests, but, according to Simon Evenett, these countries are simply attempting to get as much as possible out of their position as new, attractive growth markets.

“Their markets are so big that Western companies will certainly come. They simply want to get the most out of their market in the form of jobs for the local population, improved technology and a lot of other things.

That is why many multinationals such as McDonald’s and white goods manufacturer Bosch have a strategy of relocating their production. So far, only General Electric have been brave enough to state the facts and say that this is due to trade barriers,” he says.

Protectionism harms growth


But any prospect of putting a stop to these protectionist trade winds seems to be a long way off. In the United States, neither the Republican presidential candidate Donald Trump or his Democrat opponent Hillary Clinton has hidden the fact that they will go out on a limb to protect their country against foreign goods from e.g. China and Mexico.

On the other side of the Atlantic, no one knows how the European markets will develop after the United Kingdom’s decision in June to exit the European Union.

Christine Lagarde, managing director of the World Bank, has drawn a parallel with the period leading up to World War I in 1914.

“That type of protectionism harms growth and has been seen in the run-up to many wars throughout history,” she told the Financial Times earlier this summer.

The World Trade Organisation, the forum set up to ensure free trade, is finding it difficult to get to grips with the problem.

The number of cases has not increased in line with trade restrictions. According to Simon Evenett, businesses should not put their trust in the World Trade Organisation which is a membership organisation managed by the governments of the world.

“These countries are acting on the principle that people should not throw stones if they live in glass houses. For example, when growth economies protect their industries, they are right when they say that the EU does the very same thing. The World Trade Organisation has difficulty reversing this trend because it represents those same governments,” he says.

On the other hand, he has faith in the fact that governments will at some stage have to face up to the problem as an increasing number of trade barriers emerge.

“If for no other reason than because frustrations about them will force world leaders to act,” says Simon Evenett. 
We are seeing again and again that countries are introducing rules by stealth that favour local businesses.
SIMON EVENETT, PROFESSOR AT THE UNIVERSITY OF ST GALLEN IN SWITZERLAND
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PUBLISHED: 9/8/2016 LAST MODIFIED: 3/4/2017