FINANCIAL SCENE
Worrisome decline in world trade
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Falling demand, constraints on finance in the U.S. and Europe blamed for crisis
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In the wake of the economic crisis, protectionism has emerged in many countries in a number of subtle and not so subtle ways. It will be difficult to reverse such tendencies even after the economies revive.
— PHOTO: AFP
TRADE ROUTES: Handout picture released by the Communication Unit of the Panama Canal of the Gatun locks in Colon province, north of Panama City. The canal is a major gateway for world trade.
Global trade has been a principal casualty of the ongoing economic crisis. The World Trade Organization estimates trade to contract by 9 per cent this year. Collapsing global demand and severe curtailment of trade finance by banks and other lenders have been the main factors responsible.
Together they have created constraints to export growth, especially in many developing countries. Obviously developed countries have been affected equally if not to a greater degree.
The financial crisis that morphed into an economic crisis started in the U.S. which still remains the epicentre of the crisis. Global economic recovery is dependent to a large extent on how soon the U.S. economy stabilises. The fall in demand and investment in the U. S. and Europe is a principal reason for the major setback in world trade.
All round fall in exports
Exports from the U.S. are down 30 per cent and imports 34 per cent in the first quarter of the year compared to the previous three months. Japan, heavily dependent on the U.S. market, saw its exports plunge 45.5 per cent in March this year on a year-on-year basis. Consequently its economy, the second largest in the world, contracted by 15.2 per cent, its worst ever performance since 1955. Exports from China and Brazil fell by 20 per cent in the first quarter compared with a year ago. Countries more closely linked to the U.S., Mexico for instance through the NAFTA, have fared even worse. Its exports fell by 29 per cent while its economy declined 21.5 per cent, more than three times the rate of contraction in the U.S.
India too is witnessing sizable contraction in its exports, especially in dollar terms. Compounding the exporters’ woes have been the exchange rate movements. They have been thoroughly unpredictable. A sharp depreciation of the rupee taking it beyond 51 to the dollar has been followed more recently by an unanticipated appreciation. The dollar is now trading between 46 and 47.
The crisis in trade, though originating from the financial and economic crises, has not probably received the same degree of attention from policy makers the way those crises have. Nevertheless, following the G-20 summit in London and thereafter, trade related issues have been brought back to centre stage as it were.
WTO agenda
WTO Director General Pascal Lamy in a recent report to the organisation’s General Council has emphasised the following:
(1) Trade should be kept open and protectionist measures eschewed. The WTO has asked G-20 countries to strongly support the WTO monitoring mechanism of trade and trade related measures.
(2) Try and keep trade open by concluding the Doha round, the most ambitious multilateral trade deal ever. Although considerable progress has been achieved after more than eight years of tortuous negotiations, an agreement remains elusive. At a time of global crisis the differences are likely to be sharper making the task of the negotiators that much more difficult.
(3) The WTO, Asian Development Bank and other multilateral organisations have been stressing the Aid for Trade agenda. That will enable the poorest countries to invest and improve in productive capacity and participate in the global trading system.
(4) Finally, unfreezing trade finance. According to reliable estimates, trade finance funds some 90 per cent of the global merchandise trade worth $16 trillion. The G-20 countries have earmarked $250 billion towards trade finance over the next two years but that may be too small an amount in the present circumstances.
Looming protectionism
Two other developments have aggravated the downturn in global trade. Protectionism has emerged as a major threat to trade liberalisation not only for now but over the foreseeable future. Voters in many countries have come out against outsourcing and other vehicles of globalisation. Political leaders find it convenient to blame other countries for loss of jobs.
Recent developments in the U.S. and other developed countries show how protectionism can creep in through some subtle and not so subtle means.
The proposal to extend the tax net to cover certain activities of U.S. based multinationals outside the country is one such development. A stricter visa regime in the U.S. may discriminate against Indian IT companies. Restrictions have been placed on imports in many countries. In India, the ban on export of food crops is only now being lifted.
Again, many developed countries including the U.K., Switzerland and the Netherlands will ensure that banks recently baled out with tax payers’ money confine their lending to domestic borrowers. Instances such as these are bound to multiply if as expected employment levels fall in those countries. Unfortunately an economic recovery will not lift protectionism automatically.
The crisis in world trade has been magnified by the far flung nature of multinational companies and their operations. Raw materials sourced from one country are converted into intermediate goods in another country.
Finished products emerge in a third country. Truly globalised industries such as the deeply troubled automobile industry source their requirements from different countries. The pain in one country is automatically transmitted across the globe.
C. R. L. NARASIMHAN
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