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Trade, Trade Policy and the Global Crisis

Trade, Trade Policy and the Global Crisis. Marco Fugazza Division on International Trade UNCTAD The Virtual Institute, June 2010. Outline. The great Trade Collapse The causes (emerging consensus) References. The great trade collapse. 2008 third quarter (Q3) to 2009 Q2:

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Trade, Trade Policy and the Global Crisis

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  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 GreatDepression

  5. Deepest since WWII

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

  7. Sudden and Synchronised

  8. All sectors hit

  9. Commodities vs Manufactures

  10. Trade fell more than GDP

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

  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: Rapidrecovery

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

  28. Tariffs Tariff Overhang/Water

  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. Protectionism • 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

  32. Protectionism • 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

  33. MFN Water

  34. Protectionism • But member countries do not seem to have used this policy space during economic crisis after the creation of the WTO (1994-2008)

  35. Predicted increase in MFNs

  36. Protectionism • Is it because it may be counterproductive? • Or because they are using other murkier forms?

  37. Protectionism

  38. 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 • www.voxeu.org • http://www.globaltradealert.org/ • www.unctad.org

  39. Appendix: Trade Negotiations and Tariff Cutting Formulas

  40. “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 (1963-67): 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

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

  42. 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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