April 27, 2006

Jurassic Trade Policy

You can always count on Maria Cristina Iglesias to come up with aggressively ill-conceived policies. While her boss promises to further the cause of Latin American integration by threatening to break up the Andean Community unless Peru and Colombia do what he wants, the Minister of Light Industries and Trade delivers the coup de grace: a not-particularly-veiled threat to resort to massive protectionism, perhaps going as far as banning imports of all products currently produced in Venezuela.

There's so much wrong with this idea it's hard to know where to start to pick it apart. Lets try...

Under WTO-rules (GATT article XIX), Venezuela is only allowed to break its tariff-lowering commitments temporarily and surgically, as a response to an import surge in a specific product that "causes or threatens serious injury to domestic producers" of the same product. That's called a "safeguard measure" and it's perfectly WTO-legal.

But Iglesias doesn't seem to be talking about targetted, temporary safeguards for specific products facing import surges: she's talking about across the board protection for all Venezuelan industries. (As far as I know, no development economist has ever advocated such a thing - not even List.) If Maria Cristina wants Venezuela to break its WTO commitments on this scale, she's calling for Venezuela to violate its international treaty obligations on trade. (Nevermind that under the best-constitution-in-the-world's article 23, Venezuela's international treaty obligations are constitutionally binding.) If Venezuela does that, all its trade partners have the right, under GATT article XXIII, to retaliate by withdrawing their own tariff concessions to an extent equivalent to Venezuela's violation.

Iglesias may be banking that no one is going to slap punitive duties on oil - and she's probably right about that. But all other Venezuelan export products would likely face serious market-access difficulties abroad. The result, if it plays out this way, would be to further deepen Venezuela's already highly disruptive reliance on a single, volatile commodity for export revenues...turning us from a country that exports almost nothing but oil into a country that exports nothing but oil.

But, in fact, the WTO-angle is not even the worst of it. The truly damaging part is what such a policy would do to Venezuela's political economy. By limiting imports on this scale, we would be sliding back 30 years in terms of industrial policy - all the way back to the halcyon days of CAP I, when high import barriers produced a pampered class of rent-seeking local industrialists growing ever richer while producing sub-par, over-priced products that didn't have any prospect of ever becoming internationally competitive and survived only because Venezuelan consumers had no choice but to buy them. The massive waste of resources such a policy entails not only makes the poor poorer, but it tends to established a new industrial elite that depends on state favors to survive: blanket protectionism breeds blanket corruption.

This is a film we've seen before, and frankly it doesn't deserve a sequel. The more the bolivarianos heaps scorn on the 4th republic, the more their policies recreate its worst aspects.