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Global policymakers say protectionism is rising and contributing to declining international trade.

Weathering the International Trade SlumpARTICLE

By Karen Lynch

Amid persistently slow global economic growth, national protectionism is rising and contributing to declining international trade, according to world policymakers. At the 2016 International Monetary Fund (IMF)-World Bank Annual Meetings in Washington, D.C., policymakers spoke urgently of a surging anti-globalization sentiment. One consequence reported by The Wall Street Journal after October’s meetings: investors are starting to move away from stocks as the valuations of multinational companies lose their “globalization premium.”1

Here is the problem: global growth in gross domestic product (GDP) has averaged in the low single digits in the eight years since the financial crisis. In the third quarter of 2016, it was 3.1 percent, with limited improvement expected for the next five years, according to statistics released at the IMF-World Bank gatherings.2 Partly as a result, the expansion of international trade in goods and services has slowed to just over 3 percent per year since 2012, less than half the average rate during the previous 30 years.

Other forces are also at play. Given slow growth, political figures and national governments are increasingly stalling trade liberalization agreements and seeking to protect their national economies by erecting tariff and non-tariff barriers. “Between 1 January and 31 October 2015, a total of 539 measures were taken by governments worldwide that harmed foreign traders, investors, workers, or owners of intellectual property,” according to the 18th annual Global Trade Alert Report.3 “In no previous year have we found so many trade distortions so quickly.” The measures included tariff increases, subsidies, localization requirements and “dubious trade finance initiatives,” the report said.

"Trade has become a political football,” IMF Managing Director Christine Lagarde said at the IMF-World Bank meetings.4 One example is opposition to the Trans-Pacific Partnership, a 12-country free trade deal that could eliminate 18,000 tariffs on American goods if it were adopted.5 In the European Union (EU), the Comprehensive Economic and Trade Agreement (CETA) with Canada has met with protests and a vote by Belgium’s Wallonia region to block the country’s ratification of the agreement6 – though a compromise was eventually reached.7 And according to Export Development Canada (EDC), day-to-day, exporters may face changing taxes and customs duties, import quotas, local product standards, discrimination in government procurement and, for international trade in services, a range of regulatory or certification requirements.8

Businesses React to Protectionism in International Trade

Large multinationals are reacting in different ways to protectionism in international trade. “The globalization I knew, based on trade and global integration, is changing, which is why it’s time for a bold pivot,” General Electric CEO Jeffry R. Immelt recently declared. He said his company will localize operations around the world, adding that, “we will produce for the U.S. in the U.S., but our exports may decline. At the same time, we will localize production in big, end-use markets.”9 At other large companies with global supply chains, the IMF has seen a slowdown in the relocation of production across countries and suggested that trade-distorting policies may be a cause.10

Recent advice to large multinationals from the management consultants at professional services firm EY reflects the changing environment. It includes organizing around regional centers of excellence while developing local expertise, proactively engaging with governments on policy matters, building flexible, resilient supply chains and using data analytics to quickly identify issues, assess options, optimize opportunity and mitigate risk.11

At the same time, some 295,000 small and mid-sized enterprises (SMEs) account for about a third of U.S. export value,12 but SMEs often lack the resources to apply the solutions used by large multinationals in international trade. EDC’s advice to SMEs is straightforward: “Know your market,” and “The most direct way of dealing with a trade barrier is simply to comply with it.”13

But more specifically, EDC recommends companies should adjust product pricing to absorb any tariff and get products certified as meeting local standards. Where simple compliance isn’t a profitable option, EDC said, SMEs can work with a local company or establish their own local business affiliate, which should be treated the same as a local company. Shipping and logistics companies and customs brokers are also among the service providers that aim to help clients with cross-border issues and provide broader trade consulting.14

The Takeaway

As international trade remains in a prolonged slump, trade protectionism is a mounting challenge for businesses – particularly for SMEs. But perhaps it’s only a matter of degree. As the U.S. Small Business Administration has pointed out, international trade has always been challenging. The bottom line is that “despite the challenges, international markets offer businesses opportunity to reach new customers.”15

Karen Lynch - The Author

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.

Sources

1. “Stock Prices Under Threat as Global Trade Becomes a Pariah”, The Wall Street Journal;http://www.wsj.com/articles/stocks-face-threat-as-globalization-loses-steam-1476644188 .
2. “Subdued Demand: Symptoms and Remedies”, International Monetary Fund; http://www.imf.org/external/pubs/ft/weo/2016/02/index.htm
3. The Tide Turns? Trade, Protectionism, and Slowing Global Growth, Global Trade Alert; http://www.globaltradealert.org/sites/default/files/GTA18%20The%20Tide%20Turns.pdf
4. "Managing an Inclusive Transition for the Global Economy", IMF; http://www.imf.org/en/News/Articles/2016/10/07/AM16-SP100716-Managing-an-Inclusive-Transition-for-the-Global-Economy
5. "Barack Obama: Trans-Pacific Partnership Eliminates 18,000 Tariffs on American Goods", Politifact; http://www.politifact.com/truth-o-meter/statements/2016/aug/04/barack-obama/barack-obama-trans-pacific-partnership-eliminates-/
6. “Challenges to Canadian Trade Deal Chip at EU’s Credibility”, The Wall Street Journal; http://www.wsj.com/articles/challenges-to-canadian-trade-deal-chip-at-eus-credibility-1476641207
7. "Belgium Reaches Agreement to Back Stalled EU-Canada Trade Deal.”, The Wall Street Journal; http://www.wsj.com/articles/belgium-reaches-agreement-to-back-stalled-eu-canada-trade-deal-1477564243
8. "Dealing with Trade Barriers", EDC; https://edc.trade/us-p2w1-todd-winterhalt-e/
9. "Preparing for What’s Next", GE; http://www.gereports.com/jeff-immelt-preparing-for-whats-next/
10. Subdued Demand: Symptoms and Remedies, International Monetary Fund; http://www.imf.org/external/pubs/ft/weo/2016/02/index.htm
11. Making Sense of a World in Motion – a Global Trade Perspective, EY; http://www.ey.com/Publication/vwLUAssets/ey-making-sense-of-a-world-in-motion/$FILE/ey-making-sense-of-a-world-in-motion.pdf
12. "A Profile of U.S. Exporting Companies", U.S. Census Bureau; https://catalog.data.gov/dataset/a-profile-of-u-s-exporting-companies/resource/faabe123-bf85-4a43-b0dd-f5b83aea7ac1
13. "Dealing with Trade Barriers", EDC; https://edc.trade/us-p2w1-todd-winterhalt-e/
14. Ibid.
15. Small Businesses Key Players in International Trade, U.S. Small Business Administration; https://www.sba.gov/sites/default/files/advocacy/Issue-Brief-11-Small-Biz-Key-Players-International-Trade.pdf

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