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Trade Restrictions On The Rise

by Ulrika Lomas,, Brussels

26 May 2011

Global trade and investment appear to be facing opposing forces both pushing and pulling against the prospects for economic recovery, as governments attempt to attract foreign investment on the one hand while shielding their economies from foreign competition by raising trade barriers on the other, according to a new report.

A complex picture emerges from the report, authored by the Organization for Economic Cooperation and Development (OECD), World Trade Organization (WTO) and the United Nations Conference on Trade and Development (UNCTAD), and released on May 24. It looked at investment and trade measures taken by governments between October 10, 2010 and April 28, 2011, and is the fifth such document presented to the G20 group of nations.

This triumvirate had been commissioned by the G20 to monitor policy developments and report publicly on countries' adherence to commitments made at summits in 2008, 2009 and 2010, where leaders pledged to fight protectionism, promote global trade, and roll back any recent protectionist measures. These agreements are set to last until 2013.

The investment side of the report, covered mainly by the OECD and UNCTAD, shows that while foreign direct investment (FDI) inflows have yet to recover to pre-crisis levels, 2010 saw a 3% rise among the G20 countries. They remain, however, 25% below the average levels recorded in 2005-07, and nearly 50% below the peak seen in 2007.

The report states that, during the period covered, 15 countries undertook investment-specific action. Brazil is pointed out as having tripled its tax on foreign investment transactions to 6%, and broadened the scope of the levy's application, in a bid to fight off further currency appreciation. China clarified its rules on foreign enterprise resident offices, and the extent to which foreign investors may acquire real estate, and moved towards further capital account liberalization. India brought in a consolidated FDI policy, offering greater flexibility to established foreign-owned companies, permitting FDI in certain agricultural activities, and allowing the conversion of non-cash items into equity, pending government approval. Russia is also in the process of liberalizing rules pertaining to foreign investment in the financial sector, and has reintroduced differential rates of reserve requirements for liabilities for resident and non-resident companies.

In spite of some additional measures taken in countries such as Brazil, China, Italy and Russia to restrict international investment, there is a general G20 movement towards the elimination of restrictions to international capital flows, and the introduction of improved clarity for investors. In addition, rescue packages, targeted at banks and other financial institutions, in response to the economic crisis, are now being phased out. According to the report, the outstanding issue now relates to the unwinding of those assets and liabilities remaining on government books as a legacy of emergency measures. At least six countries, including the UK and US, retain these.

The issue of how international trade has developed is perhaps more complicated, the report indicates. The WTO argues that more trade barriers were introduced in the past six months than in previous periods since the crisis, but while export restrictions are an increasing trend, measures to facilitate trade have also been taken.

New import restrictive measures cover 0.6% of total G20 imports, an increase of 0.3% over the previous six months. A protectionist roll-back, as pledged by G20 leaders, has not taken place, and the ability of governments to resist protectionism is under threat. Nonetheless, reductions or temporary exemptions of import tariffs on selected products, and the streamlining of customs procedures have also taken place.

The WTO also took the occasion provided by the report to issue yet another warning on the dangers a failure in Doha Round negotiations would bring. Leaders are urged to remain vigilant against protectionism, and to offer a united front on the issue. They are told not to take the multilateral trading system for granted, and to act in the interests of system.

In addition, the report also notes the challenge facing investment. It states that "continued macroeconomic imbalances in the global economy, weaknesses in governments' fiscal positions and commodity price volatility may undermine governments' commitment to openness in international investment". Sovereign debt problems, the Japanese natural disasters, and Middle Eastern unrest, all contribute to uncertainty and a clouded outlook.

Commenting on the report, OECD Secretary-General Angel Gurría said: “There are still many risks to the global economic recovery, so it’s encouraging that G20 countries have kept their markets open for foreign investment. But they must resist calls for trade protectionism if they want to keep the recovery on track.”

TAGS: Russia | South Africa | business | India | Saudi Arabia | export duty | banking | financial services | capital markets | tariffs | World Trade Organisation (WTO) | Organisation for Economic Co-operation and Development (OECD) | United Nations (UN) | Australia | China | Mexico | United Kingdom | agreements | Brazil | Canada | France | Indonesia | Italy | Korea, South | United States | import duty | trade | Argentina | Japan | Turkey | services | Africa

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