A troubling phenomenon is occurring in large, emerging economies: the gates are closing. Governments, skittish about global economic trends, are introducing new policies to limit imports and exports. The aim is to protect domestic industry in tough times, but the tools they are using threaten to make their economic problems worse.
A December World Bank analysis documents a trend of creeping protectionism in countries such as Argentina, Brazil and Indonesia – all countries with burgeoning industry. Instead of tariffs, other, more indirect policies are being used to hinder free commerce between countries. The Bank analysis, based on World Trade Organization (WTO) monitoring reports and data from the Global Trade Alert, a network of think tanks around the globe, found that the number of non-tariff measures (NTMs) –including quotas, import licensing requirements and discriminatory government procurement rules –showed an increasing trend in the first two years post-2008, and rose sharply in 2011. India, China, Indonesia, Argentina, Russia and Brazil together accounted for almost half of all the new NTMs imposed by countries world-wide.
The measures take various forms. In December, amid a political shake-up, Indonesia announced its intention to apply new product standards to agricultural imports. The same month, Argentina tightened technical requirements for imports and gave officials more discretion to determine who can import goods. Brazil introduced import licensing requirements for car parts and other goods that compete with domestic industry. These governments are attempting to restrict imports while staying within WTO guidelines and regional commitments. Rather than charge higher duties to slow imports, they are employing regulatory measures to do so.
While the WTO recognizes the right of governments to use NTMs to protect consumers and pursue social goals, it also holds that using NTMs to protect industry is inefficient. NTMs restrict trade volumes by increasing costs for traders – and thus consumers – in a non-transparent way, creating greater economic distortions than tariffs. Tariffs are superior to NTMs because they affect all imports equally and thus allow consumers to continue to buy from the most efficient foreign suppliers. They also generate revenue for the government and are less prone to generating quota and licensing-related rents that often go to well-connected industry players.
NTMs can also be very detrimental to poor consumers. For example, a forthcoming World Bank report on NTMs by trade policy specialists Olivier Cadot, Mariem Malouche, and Sebastián Sáez shows that Nigerian import bans on selected consumer goods generated significant increases in domestic prices of the goods. Because the products – which included food products, insecticides, and over-the-counter pain medication – made up a greater share of consumption of poor households than wealthier ones, the bans hurt the poor disproportionately. The authors estimated that removing the bans would lower prices enough to increase the real income of 3 million Nigerians above the poverty line of $1.25 a day.
The recent actions by the developing country members of the G20 contrast with the recent history of increasing openness to trade. In Indonesia, for example, the government lowered tariffs and reformed the use and prevalence of NTMs in the decade before the eruption of the 2008 global recession. Government officials set up a system to review new NTMs adopted by various government agencies so that their collateral effects would be more predictable. As part of a new, “single-window” system, the government also made a database of NTMs available online to private operators – an effort to improve their transparency. The forthcoming Bank report on NTMs considers the government’s reform program to be the most ambitious among ASEAN countries.
While the government maintained a number of NTMs, most were designed to achieve legitimate policy objectives, such as protecting the health and safety of the population. Exceptions included two restrictions first enacted in 2004 to protect domestic sectors from international price volatility and foreign competition: an import quota on sugar and license requirements for certain rice imports.
In addition to the impacts of the global crisis developing countries are also confronting greater competition on world markets – especially from China – and the effects of free trade agreements that they have signed with other developing countries. In the case of Indonesia, compliance with the ASEAN-China Free Trade Area (ACFTA) agreement meant that local manufacturers were confronted with competition from cheaper products coming from China. In 2011 industry groups demanded that the government stem the flow of imports into the country. Some also complained that the government had recently allowed the export of raw rattan, a palm used to make furniture and basket, when supplies were short locally, giving an advantage to foreign competitors.
In December the media reported that the government would restrict imports with a range of new NTMs. Agricultural imports would be required to enter only at designated ports with quarantine facilities, and a national standards system would apply to a wider range of products. The media also reported at the time that the aim of these NTMs was to protect domestic producers, including those producing fruits, vegetables, salt, footwear and textiles. But some observers, including the Indonesian Chamber of Commerce, worried these NTMs could spark retaliation from the country’s trading partners.
If Indonesia wants to shield its domestic industry, new NTMs are not the only option. A better way for the country to deal with import surges that put pressures on its domestic industry would be to institute temporary trade barriers, such as safeguard measures. These instruments, which are allowed under WTO rules under certain conditions, are emergency actions designed to protect domestic industry from a flood of imports. The measures are more transparent than NTMs and, because they are temporary, they are easier to control. If the government is set on using NTMs, one way to limit their damage would be to precisely identify those groups that are affected by competition from imports and target policies to help them without hurting the competitiveness of other successful private players in the industry. Greater transparency and monitoring of both NTMs and industry-specific support measures is a priority. Though times may be scary now, they will get better. In the meantime, it would be a mistake to impose long-term costs on consumers by using policies that excessively distort international trade.