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Trade and the Crisis Jim Rollo EPRC University of Strathclyde 20 May 2009 Jim Rollo, Sussex European Institute 1 Trade Falling off a cliff since last end of 2008 The World Bank on December 9th 2008 forecast a 2.1% fall in world trade in 2009, after an overall 6.2% rise in 2008. The IMF updated its WEO forecasts and suggested that world trade and production shrank by 45% and 15% annualised in the 4th quarter of 2008 Data for the month of December suggest an accelerating decline, with monthly drops in exports reported by China (-2.8%) the US (-6%) and the UK (-3.7%) by value; Japan reported a 44% fall in exports year on year in January 2009 following a fall of 35% in December 2008 China reported 17.5% fall in exports YoY and a 42% fall in imports in January (latter no doubt affected by commodity price falls since January 2008) In January 2009 Pascal Lamy reported to the WTO membership that even though year on year 2008 trade was up on 2007, there had been a worldwide decline in trade in November. By April IMF WEO sees World trade down 18% on a year earlier in January and Rollo, Sussex European Institute 2 forecast volume down 9% forJim 2009 -20 -15 -10 -5 0 5 10 15 Industrial Production World 2000 02 04 06 Feb. 09 Advanced economies2 -30 -20 -10 0 10 20 World Trade 30 2000 02 04 06 Jan. 09 CPB trade volume index Trade value3 Emerging economies1 Jim Rollo, Sussex European Institute 3 protectionism not the key problem- yet This is the effect of the credit crunch turning into a fall in demand Protectionism in rhetoric (Sarkozy/Berlusconi) Or promised – Buy American BUT support for financial firms and autos sector worldwide will require careful management as (if) we emerge from the slump if global competition not to be impaired But fiscal stimulus likely to involve subsidy And exchange rate falls – $ and notably £ seen by some as 'competitive devaluation but stability of $ Jim Rollo, Sussex European Institute remnibiexchange rate not consistent with this 4 Jim Rollo, Sussex European Institute 5 Dangers of increased protectionism real Trade a bellwether and potential intensifier of the recession In great depression second round of trade contraction led by beggar thy neighbour policies Danger of protectionist response if effects of stimulus especially in US/UK leaks abroad because net exporters do not expand domestic demand sufficiently Potential for WTO legal protectionism significant Jim Rollo, Sussex European Institute 6 Short term What we need to do Act to get global demand going again Find funds for trade credit needs a concerted and coordinated and further monetary and fiscal stimulus – de facto that means ex ante or ex post a realignment of exchange rates and a consequent fall in net exports in the surplus countries and an increase in the deficit countries as surplus countries take on more of the burden of sustaining global demand That also means the beginning of a realignment of power and responsibility in the management of the world economy Jim Rollo, Sussex European Institute 7 What do we need to do 2 On trade policy First do no harm so public and high profile G20 recommitment to a freeze on new protectionist trade policy measures including – explicitly - WTO legal (November rhetoric on trade was unclear) Second send trade ministers back to Geneva to finish DDA – if necessary take their passports away and lock them in a room until they agree Benefits of DDA deal look small (Though insiders say that is a mistake)and are distant Costs of no deal catastrophic signal of the failure of global policy coordination – cannot even complete a Jim Rollo, Sussex European Institute 8 weak agreement after a 7 year negotiation What happened at G20 Up to $750bn for IMF $100bn for MDBs Fiscal stimulus packages – estimated at 2% of GDP in 2009 and 0.9% in 2010 by latest WEO On trade Commitment to no increased protectionism extended to end 2010 (but weasel words on WTO inconsistent measures) Notify WTO of any protectionist measures Provide $250bn for trade Finance Overall not bad - if they mean it and iff they sustain fiscal stimulus among the net exporters into 2010 Jim Rollo, Sussex European Institute 9 The dangers to the export led growth model of development Export led growth has propelled billions out of post conflict devastation and poverty by generating historically unprecedented rates of growth It has also & however contributed to major instabilities in the global economy mainly via persistent undervalued exchange rates and consequent imbalances – Germany and Bretton Woods, Japan and the Plaza/Louvre accords, east Asia and the current crisis. Net importers toJimblame too Institute but creditors cannot10 Rollo, Sussex European walk away from their responsibility A worst case scenario This is the deepest crisis so far The threat of protectionism and competitive devaluations to boost domestic production in net deficit countries still potential but real No consumer(s) of last resort function Threatens a structural slow down in world trade and output growth Leaves the likely increase of 700 million young people to global labour market at risk of greater poverty Jim Rollo, Sussex European Institute 11 A new Bretton Woods Need global rules or a hegemon – Bretton woods had both and took a decade from the bottom of the depression and a world war to agree New system cannot just be an escape mechanism for the US It must have effective rules and legitimacy and a new G4/5 (US, China, Japan, Eurozone + India(?)) – no major economy can be exempt from monetary and fiscal disciplines if the system is to resume business Jim Rollo, Sussex European Institute as usual 12 Extract from Table 11 of IMF Regional outlook for Europe Jim Rollo, Sussex European Institute 13