Jan 22, 1992

COUNTERING PROTECTION THROUGH CONSUMER-USER POWER.

GENEVA, JANUARY 21 (CHAKRAVARTHI RAGHAVAN) – Protectionism can best be countered by involving those affected in countries (the consumers and users of imported products) in the political trade policy decision-making process - by providing them with easily understandable information evaluating the protectionist initiative from an economy wide perspective.

In this assessment of the political economy of protectionism a group of experts convened by the UNCTAD Secretary-General has recommended that transparency mechanisms, both national and global, could perform an useful role by providing in formation to all parties that would be affected by a trade policy initiative.

Transparency studies and mechanisms would not, by themselves, be the driving force against protectionism, the expert group said.

But "overtime the strategy of bringing all affected parties into the decision-making process would result in a trade policy regime that emphasises the national interest rather than special interests", the experts added.

The group of independent experts met in December. A draft report of their conclusions have now become available.

The establishment of transparent mechanisms at national level to evaluate protectionist measures sought by firms and sectors, and the implications of such measures for the domestic economy as whole and their effects on the export interests of developing countries was one of the consensus recommendations in the Final Act of UNCTAD-VII.

However, there has been little or no action from member-States in this direction.

According to Vijay Kelkar, Director of UNCTAD secretariat's International Trade convening of the expert group is part of the efforts to search for ways to reduce protectionism and protectionist policies in industrial countries which presented increasing problems for development aspirations of the Third World.

Protection in democratic societies, he said, "was not a conspiracy or an evil plot aimed at frustrating the Third World but the result of political responses to economic problems". Reducing protectionism required an understanding of the underlying political processes and needed efforts directed at the domestic political process.

A background report, by Prof. Tracy Murray, Distinguished Professor International Economics and Business at the University of Arkansas, said that the defence against excessive protectionism lay in the international community enforcing rights of trading partners and in the domestic community harmed by protectionist measures providing a counterforce.

Though in every instance of protection domestic buyers are harmed more than domestic sellers gain, and total losses from protection generally exceeded total gains, the interests of the majority in favour of less protectionist policies do not prevail over those for more protectionist policies.

This is because of the political economy of protectionism and trade policy decision-making in countries, which is biased in favour of the interests of protectionists, and against the interests of consumers and users of imported inputs.

Firms and workers in import-competing industries and sectors have large individual stakes in the policy outcome: if protection is denied the import-competing firm might go bankrupt and the workers involved become unemployed.

Thus domestic producers of import-competing goods and workers whose incomes are adversely affected place high weights on protectionist decisions and have a strong financial incentive to make their interests known to political decision-makers.

Though consumes and users lose if protection is granted, to the extent that prices rise, voters and households generally pay more attention to political decisions affecting their incomes and tax burdens than to decisions affecting prices of imported goods. Consumers of final goods seldom have a sufficient financial stake in any particular policy to bother incurring the costs of informing their political representatives of their interests.

For the domestic counterforce to protection becoming stronger and successful, "it must be organised and informed", Prof. Murray has said.

The experts agreed that losers from protectionism inside a country typically remain outside the decision-making process. Establishment of a transparency mechanism would ensure both gainers and losers to be involved in the decision-making process.

Such a transparency mechanism should be designed to provide information to all parties that would be affected by a trade policy initiative and the information should be provided by an agency responsible to conduct studies on trade policy questions, evaluate the costs and benefits of alternative trade policies including adjustment assistance and provide the foundation for knowledge-based trade policies.

The expert group agreed that economic tools are now available to estimate the costs and benefits of protection. But the biggest problem in estimating the costs and benefits is not methodology but difficulties in obtaining required economic data and information on the magnitude of important economic relationships, a problem more acute in the Third World.

Given the complexities of modern economies, and the high degree of interdependence among various trade policy measures and as between trade policy and domestic economic policies, the evaluation of protectionism should be conducted in an economy-wide perspective, the experts said.

The results of transparency studies should also be widely disseminated in a manner that conveyed important information in a form easily understood by the general public. While this did not mean that the underlying economic analysis must be simple and easily understood, it did mean that the results must tell a consistent and easily understood story.

It is necessary to catch the attention of the public, and this can best be accomplished if the results include estimates of the costs and benefits. In this "numbers" are most often the key elements in national press reports and the press would pay more attention to an (transparency mechanism agency) reports if they were produced on a predictable periodic basis.

In discussing the various linkages and determinants of protection, the experts noted that pressures for protection came from various sources - special interest efforts on the part of import-sensitive industries, infant industries, strategic industries and "rent-seekers" (those seeking increased profits through elimination of import competition).

But there was also a new kind of protectionism to safeguard the environment. This type of protection or trade measures are sought, not by domestic industry, but by environmental pressure groups such as those seeking bans on imports of tuna if the fishing techniques do not protect dolphins or because of concerns over the ozone layer and deforestation. Social issues like protection of workers rights also brought in other pressures.

These underlined the need for "transparency" to have international scope.

While the experts agreed that in any trade policy measure contemplated, and in transparency studies and mechanisms, the interests of all countries should be taken into consideration, but there was significant scepticism among the experts whether the government of one country would finance a transparency agency and charge it with studying implications of that nation’s trade policies on its trading partners.

There was substantial agreement among the experts that there was hence a need for some agency to conduct transparency studies with a world-wide perspective.

The GATT’s Trade Policy Review Mechanism (TPRM), it was noted in this connection, was only a fact-finding exercise essentially describing the trade regimes of individual Contracting Parties. No efforts were made by the GATT secretariat to evaluate the benefits and costs of trade policy regimes on the countries themselves or on the country's trading partners.

The evaluation studies from a world-wide perspective, it was suggested, should be conducted by the secretariat of UNCTAD.

The antidumping procedures in the European Community and the United States, both active users of this instrument, were seen as examples of the complexities in understanding transparency.

In the EC there was relatively little public information on the antidumping cases.

In the US, on the other hand, the administration of anti-dumping law and cases was subject to substantial public debate.

But despite the publication requirements of US antidumping law, administrators, the experts said, "a careful reading of whit is published does not provide much understanding on how a decision is reached or why it might be positive or negative. In fact the internal workings of US antidumping proceedings are opaque rather than transparent".

The Australian Industry Assistance Commission (IAC) got high marks from the expert group, which commended it as the best model of any existing transparency agency.

The other agencies and their experiences studied included the Canadian Economic Council, the New Zealand Economic Development Commission and the US International Trade Commission, as also the experiences of Brazil, India and Nigeria which did not have true transparency agencies but had institutions conducting studies on trade policy and providing reports to governments.

The US ITC which has responsibility in hearing complaints (about dumping, subsidy, injury to domestic producers, etc.), and providing findings and reports to the administration, also serves as a transparency agency on and ad hoc basis, conducting studies at the request of the President or the Congress and its committees.

But the scope of such studies are negotiated and "typically have a political agenda", and a recent transparency study of the ITC excluded the costs and benefits of "unfair trade actions" - antidumping and countervailing duty cases.

The IAC's strength arises from its ongoing statutory responsibility to study economy wide effects of trade policy including issuance of annual public reports. It had a high degree of political independence from political pressures. Its study procedures are open to the public as also its policy advice to governments but with no policy-making authority.

However, in cases involving temporary assistance, unfair trade (antidumping and anti-subsidy) actions and trade preferences favouring developing counties, the AIC is instructed to limit its consideration to "questions of injury to domestic industry" rather than conduct an economy-wide evaluation, according to the Murray report before the experts.