OECD Warns Protectionism Will Worsen Financial Crisis

19 March 2009

A new report by the Organization for Economic Cooperation and Development, the OECD, warns protectionism will worsen the global financial crisis.  The report analyzes six emerging countries and shows how their economies boomed after they opened their markets to world trade. The OECD counsels wealthy countries to learn from this experience.

The OECD says trade protectionism is not the way to tackle the current economic crisis. The report says resisting protectionist measures may not be the politically correct thing to do, but it is the economically correct thing to do to get the world out of its financial doldrums.

Director of OECD Trade and Agriculture, Ken Ash, says countries that have liberalized various sectors the most have performed the best in economic terms.

"Protectionism is absolutely the wrong thing to do. So, our advice to OECD countries is do not go there," Ash said. "Do not fall back...It does not make sense to close your markets. When governments do that...they impose costs on households, they impose costs on businesses, they choke off markets and they get the exact opposite effect of what they want. What they want they will get, if they open markets further."

The report says the wealthy industrialized countries would be wise to follow the lead of six emerging markets that have done well since opening up to world trade.

The report shows Brazil, Russia, India, Indonesia, China and South Africa have significantly reduced their border protection and have been expanding their exports much faster than the leading developed countries.

Acting Head of the OECD's Development Division in Trade and Agriculture, Douglas Lippoldt, says openness has served the global economy well and all countries should keep their markets open to improve their economic prospects.

"Protectionism inhibits, it prevents us from realizing our economic potential. It is a distortion and it leads to inefficiencies and we all are losers when it is employed...Efforts to revive stalled trade reforms would help the major emerging economies to build on the progress already achieved over the past two decades," Lippoldt said. "And, importantly to emerge from the current economic crisis with stronger trade positions and more robust performance than otherwise would have been possible. That is, if we tackle the distortions now, we have a better chance of being in better shape as we exit from this economic downturn."

The report urges the six emerging economies to enact, what it calls, a second generation of reforms. It says they will emerge stronger from the crisis if they reduce remaining import tariff barriers, reform domestic regulations that impede trade and further open up their services sectors.

The OECD economists say reviving stalled trade reforms would help the major emerging economies build on the progress they have achieved over the past two decades. It would strengthen the economies of other countries as well.

While the economic crisis did not have its origin in trade, the OECD notes trade can be part of the solution.