Trade and the crisis: What’s changed since the November G20 Summit and what next?

Posted by Jim Rollo on 26 January 2009

From Peter Holmes and Jim Rollo, University of Sussex.

What has changed since the G20 summit of November 2008?

The easy answer is that everything has got worse.

Trade is falling

The fall in world trade that emerged in the third quarter of 2008 has accelerated. The World Bank on December 9th forecast a 2.1% fall in world trade in 2009, after an overall 6.2% rise in 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 35% fall in exports year on year in December while Korea suffered a 12% fall 4th quarter on 4th quarter. These falls are driven by the fall in demand in the OECD countries in particular and by the drying up of trade credit as financial markets seize up.

The fall in trade is important in two dimensions. First trade is a bellwether of the wider economy and hence of the crisis. Second trade fluctuations first follow and then amplify fluctuations in output and demand. The more so if countries respond to the crisis with beggar thy neighbour trade policies. This trade policy driven amplification of the fall in output is what Kindleberger identified as a key feature of the great depression and is the fear that lay behind most if not all of the contributions to the VoxEU.org volume on What world Leaders Should do to Halt the Rise of Protectionism published in early December 2008 between the G20 Summit and the resumption of the Doha Development Agenda (DDA) negotiations in Geneva.

Doha is not on track

The second important news since the G20 summit is the abject failure of the world's trade ministers to get the DDA process back on track; all despite direct instructions from the G20 leaders to get it done (and indeed the unanimous pleas of the VoxEU.org authors).

A success in Geneva in December 2008 would not have changed much directly or soon. Any quick impact on trade requires coordinated macro-economic policy responses to increase global demand. But, the symbolism of an agreement in the WTO – after all the pre-eminent organisation of global economic governance – cannot be underestimated. Moreover, the symbolism of continued failure is little short of catastrophic. If the nations of the world in the face of the greatest peacetime economic crisis since 1929 cannot complete a negotiation already 7 years in the making and by most assessments un-ambitious, what chance is there to negotiate the radical changes to global economic governance and regulation required to repair the damage already initiated by the crisis and help guard against future crises?

Obama’s trade credentials are in doubt

The third event in the last 3 months is the new and eagerly anticipated administration in Washington. That alone might help unblock negotiations in Geneva. Unfortunately that is not a given. Expectations about the future course of US trade policy are far from euphoric in the rest of the world. The electoral rhetoric of both the Democrats standing for Congress and of President Obama was far from warm towards open trade (see Jagdish Bhagwati's post on VoxEU.org for a particularly pessimistic take on Obama and trade). The much vaunted White House website makes no mention of US trade policy under economic policy or anywhere else as far as we can find as of 25 January. Ron Kirk the USTR designate has no track record in trade policy. His resume describes a man steeped in domestic and regional politics – albeit in a state that is highly dependent on exports. Neither has he the background of Congressional wheeler-dealer who can steer the President’s, we hope liberal, trade agenda in response to the global crisis through a legislature that is both responsible for, and currently quite protectionist on, trade policy.

Trade policy is traditionally domestic interest group politics by other means which underlines its sensitivity. None the less trade is a key signaller of where the economy is efficient and where it is not. This is even more important in a crisis than in good times when a rising tide floats all boats.

Keynes at home, Smith abroad

 As Ann Capling memorably put it in the VoxEU.org volume, the response to the current crisis should be Keynes at home and Smith abroad. We agree with this assignment – although we also think there is a case for global Keynes, with crucial implications for trade and growth strategies as well, to which we will return in a later post. Essentially if all the burden of macro-economic stimulus is put on the countries with persistent current account deficits it will be impossible to sustain their domestic expansion without resort to protectionist measures. If the crisis is persistent and deep then such a protectionist response in the countries which have provided the consumer of last resort facility for the global economy threatens a shift to a low export/low growth equilibrium for the world with potentially dire consequences for the poorest countries looking to export their way out of poverty.

The US should not move further away from liberal trade policy at this crucial moment in the crisis. Indeed, for the good of the American economy, for the good of the world economy and as part of a global response to the crisis necessary to encourage others to cooperate with US policies, America needs a more liberal trade policy than President Obama inherited from the Bush administration. This requires political courage but the President has no apparent lack of that. President Obama quoted George Washington in his inaugural address in response to the Crisis. We would recommend to him and his fellow leaders Benjamin Franklin’s famous aphorism at the time of the Declaration of Independence "We must all hang together, or assuredly we shall all hang separately"

What Next?

The trade agenda remains the same now as in December but more so, therefore the G20 in London should act to:

  • Complete Doha even symbolically.

In those circumstances we note that a new USTR (and actually a new EU trade commissioner) has an opportunity to repudiate past sticking points and break the logjam. Moreover, heads of government should send their trade ministers back to Geneva and tell them they cannot come home for any reason until they have a deal on modalities for completing the DDA. Only half in jest we propose that the Director General of the WTO should hold ministers’ passports until the deal is done. Trade ministers could at a minimum agree to bind existing applied tariffs as the key part of the final deal.

  • Set in train the establishment of a multilaterally policed transparency and surveillance mechanism on WTO compatible protectionist measures (such as raising applied tariffs closer to bound levels; anti-dumping measures; Countervailing Duties; safeguards; actions under Article XX of the GATT etc) and on the proliferation of bilateral agreements.
  • Commit themselves to a collective 12 month freeze on new protectionist measures, even those that are WTO-legal (see list above) to give the Geneva negotiators space to get on with completing Doha.
  • Examine means by which trade credit along with domestic lending can be freed up quickly.

There is much for the London Summit to tackle on trade; the pace at which trade flows are falling may well push trade issues much further up the agenda.

Peter Holmes and Jim Rollo

University of Sussex

 
Footnotes
2. FT Jan 14th 2009