CRISIS MANAGEMENT INTERNATIONAL BUSINESS, PROTECTIONISM, & CONFLICT

1. CRISIS MANAGEMENTINTERNATIONAL BUSINESS, PROTECTIONISM, & CONFLICT WTO PROJECTIONS ERWIN RAMEDHAN

2. INTERNATIONAL TRADE IN SHARP DECLINE • The decline in international trade is the deepest in 60 years: - 9%. • Advanced industrialized countries = - 10%. • Developing countries & emerging markets = - 2-3%; growth was at 15% 2000 – 2008. • The financial crisis since the last quarter 2008 has reduced demand in Europe while the banking system is unable to finance the economy. • Exports are declining faster than production globally: Argentina (-36%), Canada (-35%), Japan (-35%), Chili (-41%), etc. (Jan. 2009). • Japan Feb. 2009: Exports -50%. Imports – 43%.

3. CHINA, US, EUROPE, & THE WORLD • 70% of China’s exports are to the US and Europe. They have declined by 28 and 26% in Jan. and Feb. 2009. • The impact of the crisis has been the most serious in the Asia Pacific region with Air Cargo transport declining by 26% in December 2009 (- 23% globally). • The Baltic Dry Index measuring the cost of maritime transport is down by 94% after a decline of 80% in the last quarter of 2008. • The fundamental question: when will this decline cease. Is the estimation of a contraction of the world economy of 1 – 2% realistic enough? • The IMF estimates that the shortfall in international trade at $100 -300 billion in 2009 and will affect 6 – 10% of international trade.

4. VERTICAL SPECIALIZATION &PRODUCTION GLOBALIZATION • Production is now of a global nature with many countries working jointly to create one product making the impact of the recession greater. • This process of vertical specialization can be described as the choice by one country of one or several stages of production to be followed up by another country (ies). • The Economist estimates that vertical specialization has increased by 30%. • World trade has increased by 1/3td because of vertical specialization.

5. VERTICAL SPECIALIZATION TRENDS • Vertical specialization has been made possible through free trade with policies aiming at lifting trade barriers (quotas and tariffs) and rapid progress in transportation and communication. • Vertical specialization has developed linked to outsourcing and not demands improved infrastructure and communication but also involves other economic activities such as quality control, testing, etc. • Examples of sectors in vertical specialization: electronics (conditioned by wages and trade regulations), automotive (id.), chemical (maritime regulations), textiles (infrastructure).

6. ECONOMIC CRISIS AND PROTECTIONISM • G 20 (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, south Korea, Turkey, UK, USA, EU) fear the rise of protectionism within this group representing 90% of global gross product, 80% of world trade, and 66% of the world population. • Since the last meeting of the G20 in November 2008 not much progress has been accomplished in the area of free trade and WTO’s Doha Round is still pending. Tariffs and quotas continue to increase. In the US the Buy American product is amplifying and the EU is taking all kinds of anti dumping measures against China. EU is limiting imports of biodiesel from the US.

7. “THE ROAD TO HELL” • Regional economic conflicts have appeared with the statement of EU’s President Mirek Topolanek (Czech Republic) that US economic policy is “the road to hell”. • The global financial market is threatened because of the US stimulus policy, US protectionist policy is condemned, mistakes made in 1929 are repeated in the eyes of European observers. • The EU is also refusing stimulus plans the Obama way by arguing that Europe’s public sector is already transferring bigger funds towards the economy than the US. • The ECB or European Central Bank is giving priority to the stability of the European currency (Euro). • Easter Europe which was very much pro US is now switching its support in favor of the EU.

8. CRISIS MANAGEMENT DISPUTES • With the US and the UK on one side and the EU on the other, the G20 meeting early April 2009 in London is opening with sharp differences between the members. • The US and the UK are calling on G20 member to spend $ 2 trillion to stimulate the world economy. • The Euro zone countries are against this proposal and consider that more banking regulations are needed instead of stimulus plans (Nicolas Sarkozy – France). • China, Brazil, and Argentina share the EU point of view.

9. A BRIC + I ZONE CURRENCY? • China has the world’s biggest reserves in currency, assets, and securities and has been reported to negotiate with Brazil, Russia and India for the creation of a new international currency to replace the US dollar. • Indonesia seems to support this eventual project. • Beijing is also in favor of giving a greater role to the IMF by increasing the role of SDRs (Special Drawing Rights) if China, Asia, Africa, and Latin America are given a greater role in the IMF.

10. REPLACING THE DOLLAR AS A GLOBAL RESERVE CURRENCY? • March 23 2009 Zou Xiaochuan, Governor of China’s Central Bank, proposed to replace the dollar’s role as a global reserve currency. • Zou considered that the cost of maintaining the world’s financial system is increasing for countries using this currency and the country producing the currency (US). • It reflects the increasing tension between China and the US because of China’s potential loss: $ 2 – 2.4 trillion in reserves. • The US has launched new initiative by offering to buy (back) $ 1.15 trillion in securities and American government bonds. • Although China is interested it would mean a flood of dollars, leading to the currency’s depreciation.

11. US MONETARY AND FINANCIAL POLICY • The Us has carried out massive bail outs of its banking system funded by debt creation which have flooded the world market with treasury bonds which have aspired available dollars. Foreign investments have declined globally from $ 800 billion to $ 160 billion. • This has been made possible because the dollar represents a global reserve currency which has financed the economy and the Fed is free to create dollars (it could even create an amount of dollars equal to the Chinese reserves). • China’ dilemma: to let the dollar go its way is to accept inflation and the decline in value of the $; selling Chinese reserves is world economic disaster. • The Vice Governor of the Bank of China has Hu Xiaolian has declared that China will continue to finance US debt. • Russia has the wolrd’s # 3 reserves (50% in US $).

12. COLLAPSE OF THE POUND • The Governor of the Bank of England, Mervyn King, has stated before the G20 meeting that the UK could not afford more stimulus plans without risking the collapse of the Pound. • UK has set aside 40 billion Pounds to recapitalize the banking system and nearly 600 billion Pounds for the purchase of toxic assets. • British deficit is expected to reach 10% of its GDP. • King’s initiative is a rare event in UK history, a direct intervention in British politics at a time when the London and Washington are campaigning for $ 2 trillion is stimulus plans by the G20.