(Adds Australian comments, IMF)
By Jonathan Lynn
DAVOS, Switzerland, Jan 29 (Reuters) - Policymakers sounded the alarm about the growing threat of protectionism on Thursday as new data showed a sharp fall in air freight traffic, signalling a broader slowdown in world trade.
India's trade minister, Kamal Nath, warned at the World Economic Forum that the global economic crisis could fuel protectionism to safeguard national industries and jobs.
He told Reuters that India saw growing signs of protectionism and would respond with its own measures if its exporters were threatened.
"We do fear this because one must recognise that at the heart of globalisation lies global competitiveness, and if governments are going to protect their non-competitive production facilities it's not going to be fair trade," he said.
"If there are protectionist measures India will be compelled to also take commensurate measures against those countries which will be good for no one."
Nath cited Dutch authorities' seizure last week of a Brazil-bound shipment of a generic high blood pressure drug made in India. He said India had taken up the issue with the Dutch authorities and the European Union, and hoped to resolve it.
India has raised tariffs on steel to protect local producers, a measure trade experts say was aimed at China, which India does not regard as a market economy.
Chinese Premier Wen Jiabao warned in a keynote speech at the opening of the Davos meeting on Wednesday that protectionism would only deepen and prolong the crisis.
Pascal Lamy, director-general of the World Trade Organisation (WTO), said it was to be expected that the crisis would generate protectionist pressures.
"We all know by experience that erecting obstacles to trade would make things worse. And the first thing you have to do when you have to cope with a crisis like this is don't shoot in your own foot," he told reporters. "It's pretty clear that there is a risk and that we have to be very vigilant."
The deepening economic crisis, and the failure to complete the WTO's long-running Doha round on freeing up global commerce, have raised fears that countries will block imports from their trading partners so as to protect jobs at home.
Such protectionism, if it led to tit-for-tat retaliation, would intensify the crisis, as happened in the 1930s during the Great Depression.
Nath said it was important for trading powers to continue efforts to complete the Doha round, launched in late 2001, and said he was optimistic a breakthrough could be reached in the next few months.
"I think that at this point the multilateral trading system more than ever before needs strengthening," he said.
The WTO has started to monitor trade measures taken by its 153 members for signs of protectionism. A first report this week will be updated in time for a meeting in London in April of the G20 group of rich and emerging nations, Lamy said.
"At this stage there's nothing dramatic. There are spots here and there which have appeared. Not real significant macroeconomic importance, but there is an area which deserves a lot of vigilance which is subsidies," he said.
Lamy said the crisis showed the value of a Doha deal that would preserve the current degree of trade openness, rather than one that opened new trade flows. Under international trade rules many countries can raise subsidies and tariffs to previously agreed ceilings.
An example is last week's decision by the European Union to reintroduce subsidies of exports of dairy produce, something which would be banned under a Doha agreement. Australia and other big farm exporters have protested at the move.
Australian Trade Minister Simon Crean said Australia was seeking details of the move, but said otherwise it had not encountered much protectionism so far -- not least because the WTO's rules-based system had deterred most governments from having recourse to protectionist measures.
"There haven't been dramatic signs of it but the longer the downturn occurs without a conclusion to the Doha round ... there's a greater risk it defaults to the protectionist argument," he told Reuters.
SLUMP IN AIR CARGO
In more bad news for the global economy, the International Air Transport Association said international air freight traffic fell 22.6 percent in December compared to a year earlier.
IATA called it an "unprecedented and shocking" drop and said: "There is no clearer description of the slowdown in world trade."
The International Monetary Fund forecast on Wednesday that world trade volumes would contract 2.8 percent in 2009 after rising 4.1 percent last year, while world output slows to 0.5 percent from 3.4 percent last year. Trade often outpaces economic growth and can be a factor in boosting it.
"If trade is a multiplier in growth it has the potential to be a multiplier in reverse," Australia's Crean warned.
On Wednesday, the U.S. House of Representatives approved a "Buy America" provision requiring public works projects funded by an $825 billion stimulus package to use only U.S.-made iron and steel. European steelmakers have challenged the move.
The U.S. Chamber of Commerce, which opposed the provision, believes it will be of only limited impact.
"An expansion of the current "Buy American" rules would be a dumb idea, it would be a bad idea because the natural reaction would be for our trade partners to react in kind," Thomas J. Donohue, president and chief executive of the Chamber, which represents more than 3 million U.S. businesses, told Reuters.
"The more difficult it gets the more we have to keep saying 'no isolationism, no protectionism'. We need to keep markets open, we need to keep our ability to sell stuff working and to do that we have to keep our own markets open," Donohue said. (For full coverage, blogs and TV from Davos go to http://www.reuters.com/davos) (Reporting by Jonathan Lynn; Editing by Timothy Heritage and Guy Dresser)