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The New Protectionism


One country's bailout is another's industrial subsidy. Rising tension could lead to damaging trade wars

Paris - As the world's biggest economies try to spend their way out of recession, they risk triggering another problem: trade protectionism. Developing countries are complaining that multibillion-dollar bailouts and stimulus packages give companies from the industrialized world an unfair edge over rivals from nations that can't afford to be so generous.

Smaller countries are now scrambling to defend themselves, and trade barriers are popping up worldwide. Ecuador, for instance, has hiked tariffs on more than 600 categories of imports. Malaysia is limiting the number of ports that can accept inbound goods. And on May 26, Argentina and 15 other countries asked the World Trade Organization to examine whether stimulus and bailouts are industrial subsidies, which under WTO rules could give trading partners the right to retaliate. Such expenditures "might distort trade and investment patterns for years to come," says Alberto Dumont, Argentina's WTO representative.

The White House says those worries are overplayed. One senior official insists Washington's stimulus spending is "consistent with [our] WTO obligations." But others say the bailouts—both in the U.S. and abroad—have been put together without considering their effects on trade. "It is all to protect industries at a time of economic crisis and with very little consideration of what trade rules allow," says David Spooner, a former Assistant Commerce Secretary in the George W. Bush Administration.

CANADIAN ANXIETY

Protectionism is bad news for the global economy. Worldwide trade volume is forecast to contract at least 6% this year, and both WTO chief Pascal Lamy and World Bank President Robert B. Zoellick, a former U.S. Trade Representative, have warned that protectionism could spiral out of control. It's certainly on the rise: A WTO study this spring identified more than 100 trade-restricting measures taken by 30 countries over the preceding six months. "The danger in this environment is that you get tit-for-tat retaliations, and it serves nobody's interest," Zoellick told reporters on June 9.

"Buy American" requirements in Washington's $787 billion stimulus package are adding fuel to the dispute. And more such measures may be on the way. A climate-change bill passed by a House committee, for instance, would provide aid to automakers for electric cars—but only if they're developed and built in the U.S. "We want to contain the contagion of these Buy American provisions," says Guy Saint-Jacques, Canada's No. 2 representative in Washington. Canada, the top trading partner of the U.S., is clearly worried. On June 9, 13 Canadian diplomats converged on Congress to voice their concern about measures that might bar companies north of the border from participating in U.S. stimulus projects.

After pumping billions of dollars into sickly banks and automakers, Washington may now find it harder to obtain relief for American companies damaged by unfair subsidies to foreign competitors. One of the hottest subsidy disputes in years—involving government aid to jetmaker Boeing (BA) and its European rival Airbus—is pending at the WTO, with a preliminary decision due this summer. Boeing predicts that the controversy over recent bailouts and stimulus spending won't affect the cases, which were filed five years ago. But even if the WTO rules in Washington's favor, the two sides would have to negotiate monetary damages. Some trade experts think that would now be politically difficult. "Just a year ago, the U.S. was calling for new discipline on industrial subsidies," says H. Deen Kaplan, a partner in Washington law firm Hogan & Hartson who specializes in trade. "Now, they're providing some of those same subsidies."

The U.S., of course, isn't the only country spending lavishly these days. Most European governments have enacted stimulus packages and bank bailouts—aid that's often tailored to keep the handouts at home. Vienna, for instance, provided $140 billion to Austrian banks hard-hit by losses in Eastern Europe but stipulated that none of the money could be used to aid subsidiaries outside Austria. Similarly, China has provisions that could bar foreigners from much of the work funded by its $586 billion stimulus package.

Meanwhile, trade barriers continue to rise worldwide, from a new rule in Azerbaijan requiring time-consuming lab tests on some imports to a "Buy Paraguayan" program that favors domestic companies for government contracts in the South American country. "There's nothing surprising about the protectionist backlash," says Serhan Cevik, an analyst specializing in emerging markets at Nomura International in London. "In times of crisis, politicians get away with these things."

With Jane Sasseen and Steve LeVine in Washington

Matlack is BusinessWeek's Paris bureau chief.

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