From overhang to hangover: consequences of protectionist responses to the global crisis for low-income countries

Abstract

As the global economic crisis unfolds, policymakers around the world are faced with increasing pressures to resort to protectionist measures in support of domestic producers. While observable recent protectionist trends are certainly a far cry from the spiralling protectionism of the 1930s, and the trade restrictions implemented so far are limited in scope, it is widely expected that pressures on policymakers to adopt protectionist measures will intensify as the crisis deepens. Inspired by the approach proposed in Bouet and Laborde Debucquet (2009), this paper employs a global computable general equilibrium (CGE) trade model to contrast the outcomes of a successful Doha agreement with the consequences of a scenario in which countries raise their import duties to the maximum levels compatible with current WTO obligations. The study complements the earlier CGE analysis of Bouet and Laborde Debucquet by using a more differentiated regional disaggregation with a particular focus on low-income regions in Asia and sub-Saharan Africa, by adopting alternative factor market closures that allow for unemployment and underutilization of capital in the short run, and by incorporating the most recent (December 2008) Doha Round draft modality revisions in the analysis. The illustrative simulation results presented hereconfirm that a widespread resort to WTO-rule-consistent protectionism in response to the crisis would have drastic adverse implications for developing country trade and welfare, especially if factor market imperfections are taken into account. A swift successful completion of a meaningful Doha Round – i.e. a Doha Round that is not hollowed out by a plethora of exemptions - would gradually reduce existing binding overhangs considerably and would thus reduce the threat of a WTO-compliant rise in global protection that is bound to impede a global economic recovery.Doha round; protectionism; global financial crisis; binding overhang; developing countries; least developed countries