The Fateful Allure of Protectionism: Taking Stock for the G8

Having reviewed the available evidence on the implementation of the G20 commitment to refrain from raising new barriers to trade and investment, this World Bank-CEPR report identifies four reasons why increased vigilance against protectionism is called for over the next 12 months. 1. Only a small portion of the stimulus package money has been spent so far. As government expenditure will be directed towards local economic activity, the incentives for trading partners to respond in kind and discriminate against foreign firms and products may rise. 2. Even the most optimistic forecasts for economic recovery imply substantial increases in unemployment in the major trading powers in 2010 and, in some cases, in 2011. In fact, the rises in unemployment experienced to date are smaller than those expected in the coming year. Rising unemployment has long been associated with government resort to protectionist measures. The protectionist temptation will almost surely intensify before it abates a finding that will hold even if the much vaunted "green shoots" do emerge into recovery. 3. Many governments now have little margin for manoeuvre in fiscal and monetary policy, and in the event that the recession persists, they could resort to trade and industrial policies as a stop-gap. 4. A significant increase in the use of trade-distorting policy by a major jurisdiction could set off unwelcome domino effects, not unlike that witnessed for auto subsidies, diary export subsidies, and procurement nationalism in the last few months.