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Trade, Trade Policy and the Global Crisis Marco Fugazza Division on International Trade UNCTAD The Virtual Institute, June 2010.

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Presentation on theme: "Trade, Trade Policy and the Global Crisis Marco Fugazza Division on International Trade UNCTAD The Virtual Institute, June 2010."— Presentation transcript:

1 Trade, Trade Policy and the Global Crisis Marco Fugazza Division on International Trade UNCTAD The Virtual Institute, June 2010

2 Outline The great Trade Collapse The causes (emerging consensus) References

3 The great trade collapse 2008 third quarter (Q3) to 2009 Q2: Steepest trade drop in recorded history. Deepest since WWII.

4 The great trade collapses vs. the Great Depression

5 Deepest since WWII

6 The 7 worst months for trade growth since 1965 have occurred since November 2008 All 104 nations in WTO data experiences drops Sudden and Synchronised

7

8 All sectors hit

9 Commodities vs Manufactures

10 Trade fell more than GDP

11 Source: Freund (2009) Trade to GDP Elasticity: estimates by decades

12 Emerging Consensus on the causes Supply or demand shock? Consensus: Demand amplified by –“Compositional effect” –“Synchronicity effect”

13 Compositional Effect Unusual nature of the demand shock: –Lehman-linked “fear factor” produces global “wait and see” –Demand for all “postponeables” plummets Postpone-ables = Small share of GDP (say 10 to 15% globally?) Big share of trade (over 80%) Common shock has bigger effect on trade than GDP due to compositional effects.

14 Synchronicity effect Unusual nature of the demand shock implies – 1. Fear-factor demand shock is transmitted instantly and globally –2. International supply chains & “just in time” trade collapse

15 Supply Side Factors Bankruptcy-linked supply chain disruptions Credit problems, especially trade credit Protectionism

16 Supply Disruptions

17 Supply Disruptions? Evidence from Japan, France, and US: –Most adjustment was “intensive margin” US firm-level data also showed this for Asian crisis.

18 Credit Problems Survey Evidence

19 Credit Problems Direct evidence from Japanese firm-level data for the 1990s Japanese banking crisis. Direct evidence for historical banking crisis and general exposure to financing (but not trade credit per se).

20 Credit Problems Scant, but more direct evidence: –Drop in trade financing smaller than drop in exports, 2008:Q2 to 2009:Q2

21 Global Imbalancces Recent improvements in global imbalances

22 Recent improvements in global Imbalances

23 Hitorical trade collapses and recoveries

24 Simulated recovery

25 Simulated trade imbalances: Rapid recovery

26 Trade Policy: Basics Tariff measures: different types (Bound, MFN, Preferential) and forms of tariffs (Ad Valorem, Specific, Mixed, Compound, Tariff rate quotas) Non Tariff Measures: essentially TBT and SPS WTO measures: Anti dumping and Countervailing Duties & Safeguard measures

27 OMC Legal Commitment BOUND Unilateral Liberalization MFN Countries PTA Preference Tariffs

28 Tariff Overhang/Water Tariffs

29 NTMs

30 Protectionism During the great depression protectionism spread rapidly By 1933 world trade was only a third of what it was in 1929 Part of this slump had to do with the decline in economic activity, but several studies estimate the contribution of protectionist forces somewhere between 25 to 50 percent of the total decline in world trade

31 The protectionist response started in the United States with the Smoot-Hawley Tariff Act passed in June 1930, which raised tariffs by 23 percent Many countries retaliated The world average effective tariff (the ratio of the value of import duties and import value) increased from 9 percent in 1929 to 20 percent by 1933, with values as high as 30 percent in Germany and the UK Protectionism

32 Absence of a World Trade Organization that imposes some limits to the protectionist response: Policy Space or Murky Protectionism? Legally there is a lot of water in WTO member’s binding commitments And lots of policy space even after correcting for smoke in the water Protectionism

33 MFN Water

34

35 But member countries do not seem to have used this policy space during economic crisis after the creation of the WTO ( ) Protectionism

36 Predicted increase in MFNs

37 Protectionism Is it because it may be counterproductive? Or because they are using other murkier forms?

38

39

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41 Protectionism

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43 References Freund, C (2009) “The Trade Response to Global Crises: Historical Evidence” World Bank The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20, edited by Richard Baldwin and Simon Evenett, VoxEU e-book The fateful allure of protectionism: Taking stock for the G8, Edited by Simon J. Evenett, Bernard M. Hoekman and Olivier Cattaneo, VoxEU e-book

44 Appendix: Trade Negotiations and Tariff Cutting Formulas

45 “History” of approaches Pre-GATT: request-and-offer procedure: bilateral and sequential negotiation GATT : request-and-offer procedure: best offer given to any negotiating partner extended to all Kennedy Round ( ): proportional-cut formula : -35% in average tariffs Tokyo Round: Swiss formula : -30% in average tariffs Uruguay: broad tariff reduction goals (-30% in NAgri and 15% at least in agriculture) DOHA: swiss formula for NAgri + tiered formula for Agri + excluded products

46 Propotional vs Swiss Swiss (coeff. a): t 1 =(a*t 0 )/(a+t 0 ) Proportional (b% cut): t1=(1-b)*t0

47 Tiered Formula: Agriculture Developing countries (2/3 of DEVs cut) Developed countries 48-52%55-60%62-65%66-73% cut


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