Global economic crisis and trade policy Shcherbinina R15 June 2010
Outline The causes of global economic crisisChannels of transmissionThe impact of crisis on global tradeGlobal crisis and trade creditRising protectionismOutlookRole of trade policy
Global Economic Crisis In order to assess the role that can be played by trade policy one has to understand the causes of the crisisCauses: Common elements: high credit growth, asset price appreciation (house price boom) large capital flows. New elements: increased financial integration, greater financial complexity, weakness in regulation and supervisionChannels: Financial and trade linkages
Channels of transmission Financial: As the crisis emerged in the US subprime, it spread to other US financial marketsInternational transmission: liquidity; banks with exposure to US, freezing of credits marketsSolvency: financial meltdownTrade not a channel for contagion of the crisis, but casualty.
Impact on trade Although the current crisis is a financial crisis and is transmitted through the financial channel internationally, it has an impact on both the supply-side and demand-side of trade.Supply-side impact: Trade has collapsed due to drying up of trade finance; collapse of vertical integration; disruption in international capital marketsDemand-side: collapse of demand in advanced economies has a significant impact on emerging market economy exports
Impact on trade Until mid-2008, slowing of OECD demand offset by strong growth in exports of capital- and high-tech productsCapital good producing economies: Japan, Germany, Taiwan, China and US-most affected by collapse of investmentGDP collapse in Japan 12.1 %, 21% in Korea and 25% in Taiwan and China
Quarterly world exports and imports, 2005-2008
Impact of Global Financial Crisis on Trade
Global crisis and trade credit Global financial crisis might have reduced the trade finance (WTO, 2008)G20 meeting on 2 April 2009: ensure $250 billion for trade finance to promote trade and investment over 2 years (through export credits and investment agencies)Supply-side failure: sharp fall in trade finance in advanced economies; increase in credit pricesPossible explanations: herd behavior (S-T); global consolidation and concentration (L-T)“perception that domestic local banks were no longer in a position to be reliable counterparts, and the absence of possibilities to "securitize" outstanding loans, convinced international banks that, despite an existing demand, the level of risk had become too high relative to its remuneration” (WTO, 2008).
Response to Global Crisis: Rising Protectionism in Developed Countries
Response to Global Crisis: Rising Protectionism in Developing Countries
Road to Recovery Emerging markets economies are key to global recoveryDecoupling theory: A survey of the decoupling debate (Kose, et al 2008) reveals that during the last period of globalization (1985-2005) there has been convergence of business cycles fluctuations among the group of industrial and emerging markets. While these groups have become more integrated within themselves they have become more disconnected from each other. As in the case of the current crisis the emerging markets were not initially affected (except Eastern Europe that is highly exposed to the financial crisis through its mainly foreign owned banking system). In this case, the transmission of the crisis from advance economies to the emerging markets through trade linkages were caused by the collapse of demand in advanced countries.
Road to Recovery The idea that EMEs are decoupling vis-à-vis advanced economies has been quite widespread until the onset of the crisis; however, more recent developments have discredited this view. Despite the improvement in the fundamentals of many EMEs (after the 1990s crises) and the decline in their vulnerability, it seems clear that EMEs are suffering the consequences of the crisis. The World Economic Outlook and the Global Financial Stability Report have highlighted important heterogeneity among the group of EMEs but the increase in the risk aversion (and uncertainty) has hit all of them.
Road to Recovery Given the weight of these emerging market economies in world output and trade, they have a significant role to play in terms of recovery.Although emerging economies and developing countries as a group are expected to experience sharp decline in GDP, they will still have positive growth rates unlike advanced economies, except the NIA (Hong Kong, Singapore, Korea and Taiwan).
Road to Recovery According to IMF estimates Developing Asia is the only region that is expected to have strong growth (4.8%) in 2009.Developing Asia: China (6.5% in 2009, 10.2% in 2011) India (4.5% in 2009, 6.9% in 2011).Claessens et al 2009: A recovery without credit-Financial downturns tend to last longer than economic recessionsEpisodes of credit crunches and equity price busts last twice as long as recessions and house price busts last more than 3 times as longFor recessions with credit crunches, real economy picks up while credit is still contracting.
Conclusion If the theory of creditless recovery holds: it is mainly going to be driven by consumption.Given by the increasing weight of emerging market economies, they will be the key players in recovery: as consumption is restored in these economies, demand will be restoredAs exports are a significant driver of growth in these economies and in some cases more than 40% of the value added of exports are imported:Protectionism is the wrong approach to recovery. It is only a short-term solution.
Conclusion It is important that emerging market and developing economies have access to advanced economies both for their imports and exports.Subsidies in the form of low cost loans distort relative competitiveness of EME exports EME access to imports: NTBsAvailability of trade finance is crucial to restore confidence in the market