The pace of trade reforms waned from the mid- 2000s as protectionist sentiment began to increase. With the onset of the global financial crisis， reform progress not only halted but began to reverse. As we show in this note， new trade restrictions have had， in the limited products they targeted， a strong negative impact on trade. The aggregate impact of new restrictions is modest， at about 0.25 percent of global trade， as most countries have resisted a widespread resort to protectionism. Looking ahead， however， in 2010 sustained high unemployment， uneven growth， and an unwinding of government stimulus measures suggest that protectionist pressures may rise.IntroductionThe trade contraction that followed the deepening financial crisis in 2008 was sudden and sharp， but by mid-2009 trade had started to recover. Countries publicly undertook to resist widespread protectionist measures， which alongside supportive macroeconomic policies and the existence of multilateral trade rules helped to restrain protectionist sentiment in the crisis period. However， where new restrictive measures were put in place they did heavily impact trade in targeted product categories， a finding with important consequences for policy makers.The crisis-induced collapse of trade caught the attention of top-level policymakers. On the heels of the Lehman Brothers collapse and its consequences for capital markets， the contraction in global trade was sharp and sudden. Global trade volumes fell 17.5 percent between September 2008 and January 2009 in an episode now termed the “Great Trade Collapse”(Figure 1).In downturns， trade normally falls more sharply than industrial production or overall economic activity， but the extent of the Great Trade Collapse was surprising initially. It has been largely explained by three factors: compositional effects， global supply chains， and reduced availability of trade finance. Not only was the collapse abrupt， it was also highly synchronized. In September 2008 fewer than 5 percent of OECD countries had negative export growth， while in the subsequent months nearly all experienced an export fall of more than 10 percent.Following its initial contraction at the onset of the crisis， global trade quickly leveled off and by mid-2009 began to recover. Trade rose 25 percent between May and December 2009， returning to some 90 percent of September 2008 levels.The onset of the crisis and the sharp contraction of trade raised highlevel awareness of the prospect of resurgent protectionism. The 1930s experience illustrated how increased protectionism could exacerbate a crisis and delay recovery. Moreover， recent research has enhanced our understanding of how open trade policies not only bring higher economic welfare through the conventional and well-known microeconomic effects， but also further the macroeconomic objectives of economic growth and stability.Slowing momentum of trade liberalization holds risksMuch progress had been made in freeing trade over time. Among major western European and North American countries， average tariffs fell from 15 to 4 percent during 1952–2005. In many major developing economies， tariffs increased or remained very high until the 1980s but have since come down sharply. Brazil’s average rate declined from 51 percent in 1987 to 12 percent today; India’s average tariff fell from 71 percent in 1994 to 32 percent in 2002 and 13 percent today (Figure 2). Even in sectors where tariffs remain relatively high， there has been progress toward removing non-tariff barriers (NTBs). Important examples include textiles， clothing， and footwear (TCF)， with the elimination (in the World Trade Organization Uruguay Round) of longstanding quota arrangements under the Multi-Fiber Agreement. In agriculture， the use of export subsidies and NTBs has been curtailed. Still， tariffs in these areas remain well above those in most other sectors (Figure 3).This progress implies， however， that many countries now have ample scope to raise tariffs without exceeding their WTO tariff bindings. In undertaking the substantial liberalization mentioned above， many major developing economies have reduced tariffs to well below the WTO-bound tariff rate ceilings agreed in the Uruguay Round concluded 16 years ago. Average mostfavored-nation (MFN) tariffs are far below the average WTO bound rate in such countries as Brazil (18 percentage points)， Argentina， and India. These countries have considerable scope to increase import tariffs without violating their WTO tariff commitments(Figure 4).The pace of trade liberalization seemed to slow beginning from the early to the mid-2000s， leaving substantial trade restrictions in place prior to the crisis. As Figure 5 shows， overall import restrictiveness is about 5 percent for advanced economies， compared to about 15 percent for non-advanced， non-emerging market economies (Figure 5). Despite various preferences， exports from developing economies also face slightly higher restrictions in their export markets， as shown in the right side of the figure.Awareness and monitoring have limited protectionismThus far， political leaders have shown a heightened awareness of the risks of protectionism. Mindful of the 1930s experience and trade’s contribution to macroeconomic performance， leaders of the Group of 20 (G-20) economies pledged in November 2008 to “refrain from raising new barriers to investment or to trade in goods and services， imposing new export restrictions， or implementing WTO inconsistent measures to stimulate exports.”In April 2009， G-20 leaders extended this pledge through 2010 and asked the WTO and other institutions to monitor their countries’ adherence to this pledge.This provided further impetus for monitoring activities. WTO monitoring reports cover trade measures for all countries and reports prepared jointly by the WTO， OECD， and United Nations Conference on Trade and Development (UNCTAD) cover the trade and investment measures of G-20 countries， the latter specifically in re- sponse to a G-20 request. Other institutions and unofficial entities supplement this with their own monitoring， perhaps the most ambitious of which is Global Trade Alert (GTA)， associated with the(London based) Centre for Economic Policy Research and supported by the World Bank and others.In addition to the heightened awareness of the risks of protectionism， several other factors have worked to limit the protectionist response:a. Multilateral rules and institutions have clarified the types of policy actions considered responsible. The strong WTO-based trade system has been central. There appears to have been very little resort to new WTO-inconsistent measures， and even where rules exist but leave scope for policy reversal， such as with tariff ceilings， this scope has not been widely used.b. As we observed above， trade declined much more rapidly than did overall economic activity. The ratio of imports to GDP declined as well. Although job losses mounted， they were not by and large blamed on trade.c. Macroeconomic and financial sector policies were supportive of trade. Monetary policy has been highly expansionary， with interest rates down to record lows in most advanced and many emerging economies， while central bank balance sheets expanded to unprecedented levels in key advanced economies， including in support of the financial sector. Many governments injected additional fiscal stimulus， beyond“automatic stabilizers.” The coordination of the fiscal stimulus across countries—reflecting IMF advice， helped to sustain demand. And McKibbin and Stoeckel(2009) argue that a coordinated fiscal stimulus reduces protectionist sentiment by more than individual packages could do alone.There is a risk now that protectionism may increase. Unemployment has risen and may remain high， and more countries now face limited fiscal space. This may help to explain the increased frequency of industry’s requests for trade remedy measures (Figure 6). Also， unconventional measures， which are harder to quantify， may already have had a considerable impact. Analysis such as that by GTA has focused attention on the extent of this “murky” protectionism effected through more subtle， often “behind-the-border，”measures.New trade restrictions have visibly reduced tradeWith monitoring activities coming to quite different conclusions， the extent of harm caused by trade restrictions has been unclear. None of the watchdogs suggests that we have， or likely will， see an extreme protectionist surge as witnessed in the 1930s. But characterizations differ markedly. The March 2010 joint OECD-WTO-UNCTAD report indicates that protectionism has not escalated meaningfully， and suggests that new instances of measures have declined: “Although some G-20 members continued to implement new trade restrictive policies， in apparent contradiction to their pledges at London and Pittsburgh， the overall extent of these restrictions has been limited and an escalation of protectionism has continued to be avoided. There have been fewer instances than in earlier [recent] periods of G-20 members taking potentially trade restrictive measures， and more cases of trade opening measures….” In contrast， GTA’s 4th Report， released a few weeks earlier， argues that as reporting and investigative lags are being overcome， “the extent of anti-foreigner discrimination is much higher than originally reported” and that despite improved macroeconomic conditions the frequency of new measures taken in the fourth quarter of 2009 continued at pace with those taken at the height of the crisis， earlier in 2009.Our analysis finds that newly implemented trade restrictions have already had a strong negative impact; fortunately， they have covered only a small share of trade. There is strong statistical evidence that trade in products targeted by protectionist measures indeed declined significantly. And if protectionist measures become widespread or are allowed to balloon， this would cause significant harm to global trade and stifle the broader economic recovery. The impact on targeted products is apparent from the raw data， as shown below， but we also use econometric methods to confirm this rigorously and to estimate the quantitative effect on aggregate trade.We match data on measures from the monitoring activities with detailed data on actual trade flows. For an intuitive sense of whether new measures have affected aggregate trade， we examine how (within the same product category) bilateral trade targeted by new measures has evolved as compared to bilateral trade that has not been targeted by new measures. More specifically， we use monthly bilateral (import and export) trade values at the 4-digit (HS) product level， as reported by the largest trading countries through late 2009. To identify those trade flows targeted by new measures， we then use information from the GTA database on the 4-digit product category (or categories) and bilateral trade partners targeted by a new measure and the month in which the measure was implemented. A wide array of measures is considered (Figure 7)， some of which restrict imports and others that restrict or support exports. In total， we incorporate information on 184 measures identified by GTA as highly likely to be discriminatory (the so-called “red measures”).The negative impact of import restrictions is apparent in the raw data. To assess the trade impact of new measures we must account for the uneven effect of the demand shock caused by the global crisis. For example， the crisis affected trade in some products (such as durables) more than others. To separate the effects of the demand shock from those of the trade restrictions， we examine products in every time period separately and compare how trade performed in bilateral trading relationships (“countrypairs”) targeted by new measures， relative to those not targeted by new measures. Figure 8 illustrates the results of this comparison for products on which new import-restrictive measures were introduced in a particular month， November 2008. It shows that， indeed， imports targeted by new restrictions declined more than did world trade in the same products. Replicating Figure 8 for import restricting measures imposed in other months demonstrates that they also generally had a negative impact (Figure 9).Export subsidies and restrictions distorted trade as well. Analogous graphs for export subsidies and export restrictions are also presented in Figure 9. As expected， export subsidies seemingly increased targeted exports relative to world trade of the same products. Export restrictions also seem to have led to increased trade. This (initially puzzling) result is largely because the category includes measures that reduce (as well as intensify) export restrictions.Econometric analysis serves to quantify the impact of new trade restrictions on actual trade (see Annex for more detail). Henn and McDonald (2010) analyze how new trade restrictive measures have impacted detailed (4-digit) bilateral monthly trade flows， after accounting， via different fixed effects， for changes in trade flows due to other determinants than new trade restrictions. These determinants account for the facts that: (i) the crisis induced more severe changes in demand for some types of products than for others; (ii) as the crisis progressed， some countries faced more severe declines in income than did other countries; and finally (iii) bilateral exchange rates， inflation differentials， and the costs of transport between any two countries may have varied as the crisis developed.The statistical results confirm the distortionary effect of new trade restrictions suggested in Figures 8 and 9. Across various econometric specifications， new measures are found—with a high degree of statistical confidence—to discriminate against targeted trade flows. Our basic specification represents a close statistical analogue to the figures. The statistical estimates emerging from this basic specification suggest that a new restriction is associated with about an 8.5 percent distortion to trade. A refined specification finds that a part of this 8.5 percent impact is attributable to other trade determinants. After accounting for these determinants， a new restriction is still responsible for a 3 percent distortion to trade. The magnitude of this effect is striking， as it applies to entire 4-digit product categories—although most trade measures only cover a portion of these categories. This suggests that the impact on the products specifically affected may be considerably larger. Detailed analysis in the Annex separately quantifies the impact of different types of measures: import restrictions， export restrictions， and export support measures.Measures distorted aggregate world trade by about 0.25 percent. We obtain this result by multiplying the refined product-level estimates by the amount of trade subject to measures of each type. The es- timates of various specifications imply that measures distorted aggregate global trade by between 0.2 and 0.7 percent.After the crisis: continued protectionist pressureWhether this qualifies as a success will depend on how countries deal with protectionist pressures in the post-crisis period. When League of Nations members meeting in 1930 could not resist the allure of new restrictions， the ensuing downward spiral of protectionism， some of the most egregious measures came two years later， exacerbated and extended the Great Depression. This time， good intentions were formalized as pledges in the G-20 communiqué and， despite a range of individual violations， countries have resisted widespread protectionist measures， although some doubt remains in certain“murky” areas. We consider this a qualified success that can be ascribed to solid rules， strong institutions， and enhanced monitoring; and to the wisdom gained from hard-learned lessons， including the macroeconomic benefits of liberal trade policies and the need for macroeconomic policies to respond flexibly to sudden changes in conditions.We stress that where measures have been taken they have had large negative effects. The apparently modest aggregate impact of new protectionism reflects the restraint that has been demonstrated. As our results show， it does not indicate that new protectionism has been harmless. Moreover， the experience of the 1930s， the benefits of liberal trade policy for economic growth and stability， and the adverse effects of trade restrictions in macro simulation models， all suggest that expanding protectionist measures would jeopardize global recovery without addressing the factors that trigger the protectionist pressures.There are several key reasons why protectionist pressures may intensify:a. Unemployment is likely to remain high for some time and is associated with such pressures. Even with growth rebounding， a recovery in employment may occur only after many months. As leaders face political pressures to address employment concerns， protectionist pressures associated with unemployment may be felt with some lag.b. In contrast to the crisis pe- riod， high unemployment would be sustained against a backdrop of rising import growth and higher market shares of imports. This affects the success rate—and thus appeal—of anti-dumping petitions， which evidence shows were filed at higher rates in the second half of 2009 (Figure 6). More broadly， if public opinion blames unemployment on imports， poor policy choices may follow.c. As macroeconomic policy space narrows and the political consensus for sustaining monetary， financial sector， and fiscal stimulus packages erodes， a withdrawal of the stimulus before a sustainable recovery in private demand is in train would remove the support that has helped to dampen protectionist pressures.Specific developments in some countries may generate additional demands:a. Higher commodity prices bring a risk that some countries will tax or restrict commodity exports， as demonstrated during the 2007–08 food price crisis.b. Where a surge in capital inflows leads to rapid currency appreciation， as in some emerging markets， the resulting pressure on export and import competing industries sectors may generate calls for trade actions.c. Another widening of global imbalances may trigger a rise in protectionism as countries seek to remedy protracted current account deficits. As Faruqee and others (2006) argue， however， a protectionist surge would reduce global growth while leaving these imbalances unresolved.d. Perhaps most dangerously， giving in to these pressures may itself bring a response. Although uncommon to date， retaliation could become widespread if the factors just described were acted on.A stigma accompanies any reversal of the reduction of trade barriers achieved in recent decades. Widespread use of new measures—even if initially by only a few countries， would eliminate that stigma. In that event， the ability to resist widespread protectionism would depend on countries’ ability to increase trade restrictions while remaining within their WTO legal obligations， a point to which we return shortly.How to avoid a return to widespread protectionismLeaders and senior policymakers must remain on heightened alert. With the risk that protectionist sentiment may now intensify rather than subside， continuing and further enhancing the monitoring of protectionist measures and maintaining the high-level political awareness of the macroeconomic risks of protectionism will help to resist these pressures.The surest way to avoid a widespread resort to protectionism with adverse macroeconomic consequences is to conclude the WTO Doha Round. The Doha Round would bring important actual policy changes in many areas， including substantial benefits for low-income countries. Underappreciated， however， is the benefit that it would bring in enhanced predictability and security of trade policies. Because substantial past liberalization episodes have not been “l(fā)ocked in，”the binding gaps mentioned above leave considerable scope to reverse that liberalization. Industrial product tariffs of several key emerging market countries could be raised on average by some 10 to 30 percentage points and yet remains within WTO commitments. In agriculture， present commitments allow countries such as the United States to sharply raise domestic subsidies， distorting global agricultural commodity prices. These are areas in which the role of WTO commitments is the easiest to grasp. But a Doha agreement could tighten or clarify commitments and rules across a broad range of topics， including anti-dumping， food aid， services， subsidies， and trade facilitation.Senior macroeconomic policy makers should see concluding the Doha Round as part of their exit policy from the global financial crisis. New restrictions have had， in those products they have covered， a strong negative effect on trade. With unemployment remaining high and imports rebounding， and as monetary and fiscal stimulus begin to be withdrawn， protectionist pressure may intensify rather than abate. Succumbing to those pressures on a widespread scale would jeopardize the pace， strength， and durability of economic recovery.(Author: Strategy， Policy， and Review Department， IMF)