Even though the current recession is not the Great Depression, certain parallels can be drawn.  As learned from the 1930s, during economic recessions protectionist measures become more likely.  There is a high awareness of this threat both in politics and the public, and the WTO is closely following crisis responses of its member states, publishing reports on protectionist barriers.  In the 1930s the leading industrialized nations responded to the crisis by imposing trade barriers on imports and raising the tariffs. This time protectionism has been kept at bay, at least when it comes to tariff barriers. However, the economic stimulus packages passed by major industrialized countries contain subsidies and buy-local clauses that have the potential to seriously distort competition and thus harm international trade.

Not all subsidies are bad.  There are different forms of subsidies with different effects on domestic markets and international trade. They are necessary to stabilise consumption and production, help weakened economies to recover, stabilize international trade, etc. However, some of them pose a great danger to distort trade by creating unequal conditions of competition.  Contrary to limiting the use of tariffs, the WTO’s toolbox to controlling subsidies is less well equipped. Within the EU, subsidies are causing tensions but the European Commission has more advanced instruments and more power to intervene than the WTO has in the global context.

It is clear that the more the crisis spreads to the real economy, the greater the temptation will be to protect the domestic economy or provide unfair advantages. But one should understand that a policy of open markets and respect for the rules of fair competition instead of a subsidy race is the best cure for the economic downturn.

Not protectionism but free trade is the best means to weather the present crisis. The countries of the G-20 should therefore stick to their final communiqué at the London Summit, in which they pledged to do whatever is necessary to ‘promote global trade and investment and reject protectionism’ (G-20 2009). One way of keeping that promise would be to bring the Doha Round of the WTO to a successful conclusion, which would send an important message about free trade, and it would prove that the WTO is capable of acting in times of crisis. Furthermore, it is imperative to strengthen the European Commission and its role as the guardian of the Single Market. Lastly, as major trading powers, the United States and the European Union should lead by example, refraining from competition and trade distorting subsidies, working towards a coordinated and concerted approach in managing the global financial and economic crisis.

Christina Langhorst and Stormy Mildner are the authors of the Reasearch paper Good for Economy – bad for trade? The effects of European and US stimuli on international trade and competition, published by the Konrad Adenauer Stiftung and the Centre for European Studies.