16 October 2019

2019’s other nasty trade policy surprise

by Simon J. Evenett / in Op-ed

With the spotlight on the Sino-US tariff war, a worrying trade policy dynamic implicating many countries has been overlooked.

With the twists and turns of the Sino-US bilateral tariff war garnering headlines, another far-reaching trade policy development in 2019 has not received the attention it deserves. In a nutshell, momentum behind market-opening reforms has waned significantly, in particular in the large emerging markets. This development limits the gains that exports and foreign investment can bring to national economies at all stages of development. As experts and officials gather in Washington, D.C. for the IMF-World Bank Annual Meetings, they should dwell on what this under-reported dynamic means for the trajectory of the world economy.   

THE FACTS

For the first time in seven years, according to data collected by the Global Trade Alert team, worldwide there has been a sharp fall in the total number of commercial policy reforms implemented that open markets and reduce favouritism towards local firms. Compared to the first ten months of 2018, the number of new trade, investment and other commercial reforms is down 25% this year (see figure below). Moreover, of the 270 reforms recorded this year, 16 have already lapsed.

Governments have become more reluctant to open up local markets to foreign traders and investors. The total number of initiatives implemented that cut import taxes is down 39 this year when compared to the same period in 2018. Meanwhile, such are the fears about the downside of multinational companies and the like that the number of foreign direct investment (FDI) reforms introduced this year is half that witnessed over the same period last year. Lastly, government steps to boost exports, a major but often overlooked feature of some nations’ commercial policy response to the crisis, are being reversed at a much slower rate this year.

Fewer market opening measures limit opportunities for firms seeking to break into economies abroad, lengthening the odds of favourable knock-on effects like increased employment and higher investment. This shift affects trading partners at every level of development. The least developed countries benefited from 37 reforms in trading partners during January-October 2018 and that total has fallen to 29 for the comparable period this year. Meanwhile, US commercial interests operated in markets where 118 reforms took place in the first 10 months of 2018 and this year are benefiting from 26% fewer reforms by trading partners (a total of 86 such reforms occurring year-to-date).

Digging deeper into the data reveals interesting differences across the major powers. The United States and Russia bucked the trend. Both implemented more reforms year-to-date compared to 2018 — but in the US case this was mainly due to (FDI-related and work permit-related) reforms by the US states and not by the federal government. Sharp reductions in the number of commercial reforms were found in Brazil (20 fewer reforms), China (where the total number of reforms fell from 32 to 25), Indonesia (where the number of reforms fell from 32 in 2018 to just one in 2019), India (14 fewer reforms), and South Africa (total reforms collapsed from 16 to 4). The largest emerging markets have become chary about opening up their economies during 2019.

WHAT'S GOING ON HERE

If the developments year-to-date portend a permanent loss of reform momentum, in particular in the large emerging markets, then this will constrain the growth of South-South trade, to the detriment of other developing countries and buyers in the slower reformers. Supply chain development will suffer too.

It is worth asking whether the pull back on reform in the large emerging markets could be related to the Sino-US tariff war. There could be at least two links. First fears, however exaggerated, of more and more Chinese products being deflected from the US market as the bilateral trade war ramped up, could account for the falling number of import tariff cuts observed.

Second, a greater reluctance of liberalise FDI policies may follow the pattern set by many industrialised countries that have tightened up screening of foreign mergers and acquisitions (M&A), in particular Chinese M&A. In both cases, bad policy is driving out good (the trade war variant of Gresham’s Law).

Another potential explanation is that diminished reform momentum is the logical consequence of more governments implementing aggressive industrial policies. Core to such strategies is that states seek to reserve more of their domestic markets for local firms. Such approaches may be more attractive in those economies with larger domestic markets — in which case what we could be witnessing in 2019 is the next phase in the post-crisis shift away from market-driven development strategies.

But still the question remains why was 2019 the trigger? Did 2019 mark the year when influential pro-reform forces in many nations independently threw in the towel or lost ground? In which case, the rot has now spread far wider than Washington DC and Beijing and nations with smaller domestic markets will need to intensify cooperation to advance their commercial interests.

 

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Simon J. Evenett is Professor of International Trade and Economic Development at the University of St. Gallen. He coordinates the non-profit, independent trade policy monitoring initiative, the Global Trade Alert.

 

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