Why Trade Matters
At times of global economic and financial crisis keeping trade open matters in this the new age of explosive globalisation. As I pointed out last week about three-quarters of the increase in global GDP growth in recent years has been attributed to the expansion of trade.
The world economy is immeasurably more open today than in earlier historical periods. Even the most self-sufficient economies, to take two contrasting examples, China and the United States, have become very trade dependent. As a result, the prosperity of not only these two countries, but that of practically all nations, depends on the continued expansion of global trade.
Because of this, there is great concern over global and national efforts to exit from the strategies introduced to cope with the global recession. The fear is that premature termination of stimulus packages could trigger a “double-dip” in the global recession. Added to this, there is the continued need to guard against the disaster of governments designing stimulus programmes to reduce import dependence and/or promote export-led growth.
As I have previously observed it is very tempting to seek to bias stimulus packages in support of domestic sectors and jobs through increasing domestic demand. As we shall see more clearly in the course of later discussion of this topic, the threat of such inward-looking and protectionist approaches in national efforts to cope with the global economic crisis is a real and pressing one. Of particular concern is the estimate that global stimulus packages presently account for three percent of global production and trade!
Breaking the Trend
In every year over the past quarter of a century (1982-2008) the volume of global trade (or trade in real terms, not nominal values) has expanded. This is a remarkable trend. However, for the first time this year, according to the World Trade Organisation (WTO) global trade is projected to decline by as much as nine percent! This decline is best appreciated when compared to recent growth rates of global trade. In 2006 the volume of global trade grew by 8.5 percent. And, in 2007, it grew by 6 percent. In 2008 global trade fell to 2 percent, but most of the decline came in the second half of the year, after the financial crisis had exploded.
Readers would recall from earlier discussions in these columns that between the third quarter of 2007 and mid-2008, there was rapid growth in trade and an explosion in food and fuel prices. Oil prices peaked at US$147 a barrel and some food prices trebled.
There are other estimates of the likely decline in global trade this year. Some, like the World Bank’s are lower (6.1 percent); and, others higher. Thus the Organisation for Economic Cooperation and Development (OECD) has estimated a 13.2 percent decline in global trade for this year. In all the estimates I have seen however, most of the decline is expected to occur in developed economies.
Thus the WTO projects a particularly severe decline of 10 percent for developed economies this year, and for developing countries a decline of between 2-3 percent. This is significant because the developing economies as a group are for more dependent on trade for growth.
Trade has been an engine of growth for developing countries and particularly the group classed as the least developed countries (LDCs). UNCTAD data reveal the rapid growth and deep dependence of poor countries on trade. Thus the ratio of exports to GDP for developing countries was 26 percent in the mid 1990s. By the end of the pre-crisis year (2007) this ratio had nearly doubled to 51 percent. For the LDCs the situation was more striking. The ratio rose from 17 percent in 1995 to 45 percent in the 2007, an increase of 165 percent. In the case of the Latin American Caribbean region, the ratio has risen from 13 percent in 1995 to 30 percent in 2007. This is an increase by a factor of 2.3.
Cancelling Out Gains
With these data we can see why the global economic crisis risks the cancellation of economic gains made by developing countries since the mid-1990s.
It certainly puts at risk the attainment of the Millennium Development Goals (MDGs), several of which I have already pointed out in earlier columns, institutions monitoring the MDGs (the World Bank and the United Nations Development Programme) have indicated.
It should also be borne in mind that the projected decline in global trade is taking place in conjunction with the first decline in world GDP since the 1930s. Indeed the argument here is that the two reinforce each other in a cumulative negative spiral.
Over the past few years most economists had expected that with the increasing share of poor countries in global trade, and the noticeable diversification in the pattern of international trade flows, economic disruption in rich countries would not have led to the severe repercussions of the past. That is: “when the rich countries sneezed the poor ones would catch a cold or worse, pneumonia”.
Despite the diversification of trade in the major emerging markets of Asia, Latin America and Eastern Europe, and the rise of South-South trade, the WTO has found there is no evidence of a “decoupling effect” that could have made poor countries less exposed to a global economic crisis centred in the US economy.
At this stage therefore we need to address two issues. One is, what efforts have been made at the global level to treat with trade as an integral response to strategies for coping with the global economic crisis, financial crisis and credit crunch?
This involves principally looking at efforts coordinated at the G20 and global financial institutions, especially the World Bank and the International Monetary Fund (IMF). The other issue is the state of international negotiations on global trade at the WTO.
Before we get to these, I need to clarify next week a few issues readers have raised on matters touched on so far in the discussion of trade policy as a crucial lesson to be learnt from coping with the present global economic crisis.
