(Weekly Organ of the Communist Party of India (Marxist)
August 09, 200
Global Trade in a Time of Crisis
C P Chandrasekhar
the world well into the second year of a recession whose intensity is
unprecedented in the period since the Second World War, two questions
receiving considerable attention. The first, of course, is whether the
of a decline in the rate of contraction of output and rate of increase
unemployment in the
The case for desynchronisation is difficult to make in a globalised and more integrated world for three reasons. First, globalisation implies that integration of economies through trade is substantially more than it used to be so that a downturn in one part of the globe would quickly transmit itself to other regions and countries. Second, globalisation results in the creation of multi-country production platforms for various final goods. This creates international production chains, so that an increasing share of trade is not the cross-border movement of products from different industries and activities or even of dissimilar products from technologically similar industries. Rather a significant part of trade is intra-industry and involves the movement across borders of semi-finished products at different stages of processing. When a recession hits any particular industry and reduces the volume of trade in that area, the derived demands for the inputs at different stages of the production chain fall, spreading the effects of the recession globally. Finally, trade liberalisation has removed quantitative restrictions and reduced import duties across-the-board in most countries. Depending on the extent of trade liberalisation the relative importance of the domestic market in driving growth has declined to different degrees in different countries. This implies that unless countries alter the degree of protection they resort to, using the domestic market as a foil against the effects of a decline in trade is difficult to ensure. And opting for protection at a time of crisis would only invite retaliatory action from trade partners.
These features of trade in a globalised world imply that desynchronisation leading to some countries serving as shock absorbers and even sources of stimuli for growth depends on the degree of globalisation and liberalisation itself. This in turn implies that assessments of the extent of desynchronisation cannot rely merely on evidence on the differential distribution of the slowdown in GDP growth or increase in unemployment, but must examine changes in the rate of growth and pattern of world trade as well.
SHARP DROP IN
IMPORTS AND SERVICES
Trade data at a global level is released with a lag when compared with data on GDP and in the case of some countries even when compared with employment and unemployment data. Not surprisingly, it was only in July that the data on international trade trends during the first quarter of 2009 in the G7 countries and the world economy was released by the OECD Secretariat and the World Trade Organisation respectively. To recall, while the slump in production in the developed countries has been with us since the end of 2007, it was in the last quarter of 2008 and the first quarter of 2009 that the crisis was most intense. And whatever evidence we have about the crisis moderating and even possibly bottoming out comes from the second quarter of the year. So the most recent evidence on international trade trends relates to the period when the recession was possibly in its most intensive phase.
As the WTO’s World Trade Report 2009 notes: “Signs of a sharp deterioration in the global economy were evident in the second half of 2008 and the first few months of 2009 as world trade flows sagged and production slumped, first in developed economies and then in developing countries. Although world trade grew by 2 per cent in volume terms over the course of 2008, it tapered off in the last six months of the year and was well down on the 6 per cent volume increase posted in 2007.” The most important trend the evidence points to is the sharp contraction in imports into (and, of course, exports from) the G7 countries. The decline in import growth relative to the previous quarter which was close to 6 per cent in the last quarter of 2008, jumped to 10.5 per cent in the first quarter of 2009. This trend seems to be generalised across the G7.
The contraction in import growth on a year on year basis was even sharper. The quarter-on-previous-quarter and year-on-year rates of growth of imports stood at -9.5 and -23.3 per cent for Germany and -11.8 and -19 per cent in the case of the US. With the G7 countries accounting for 40 per cent of global merchandise imports this must have had a severe contractionary impact on global economic activity.
The slowdown was not restricted to merchandise trade alone. Compared with the previous quarter, the value of imports of goods and services into OECD countries, measured in seasonally adjusted current price US dollars, dropped significantly in the first quarter of 2009, even if less sharply then the volume of goods imports. The figure fell by 15.2 per cent. On a year-on-year basis, the value of imports of goods and services declined by 27.9 per cent. Thus the sharp drop observed in Q4 2008 continued in Q1 2009, though in both comparisons, goods fell much more sharply at about twice the rates than those of services.
effects of this slowdown on countries like
significant given the role of this product
group in the hi-tech manufacturing sector in
point is that exports in general and therefore
the exports of services constitutes a much smaller proportion of GDP in
than merchandise exports constitute in China’s GDP. Hence, it is not
Seen in this
light, the argument that even if the G7
economies, especially the US, continue to bounce along the bottom, the
economy can record a significant recovery because of a return to high
China and India does not seem to have much basis. This would require in
first instance a sharp shift in
If this combination of factors does not play out, there is unlikely to be a return to high growth in these two large economies, which could help lift the global economy without aggravating pre-existing global imbalances. On the other hand, if there is any revival of growth in these economies because of a leakage of the demand generated by the State-financed stimulus being experimented with in the US, UK and elsewhere in the G7, imbalances both in terms of the global distribution of growth and the global balance of payments would only intensify. This would intensify current demands for a dose of protectionism. Not surprisingly, the World Trade Report from the WTO has among its focal themes, “the challenge of ensuring that the channels of trade remain open in the face of economic adversity.” This, in its view, requires the design of “well-balanced contingency measures” to deal with a variety of unanticipated market situations, with “the right balance between flexibility and commitments” in trade agreements. “If contingency measures are too easy to use, the agreement will lack credibility. If they are too hard to use, the agreement may prove unstable as governments soften their resolve to abide by commitments.“ But the current conjuncture seems to be one where such balance would be near impossible to achieve.