Echanges

Trade, policy and the economic crisis

 

Global trade fell by 12.5% in 2009. Several factors explain this fall: the collapse in demand, the drying up of trade finance, a larger fall in demand for highly traded goods (such as machinery and transport equipment) relative to less traded goods and services, and the vertically integrated nature of global supply chains.

Early resort to protectionist measures has been relatively muted and does not play a significant part in explaining the fall in trade – only about 1% of world imports were affected by new trade restricting measures. The rapid and coordinated G20 response to ensure adequate trade finance was available for viable transactions seems to have been effective.

Given their sheer size, stimulus measures taken to rescue sectors of systemic importance (such as banking) or to preserve jobs (as in the automobile industries) or to stimulate growth (such as consumption tax reductions) or “buy national” measures may be more significant in terms of their potential impact on trade than direct trade policy measures.

But dollar for dollar, direct trade restricting measures have the most strongly negative impacts on both trade and growth: simulations suggest a US $1 increase in tariff revenues results in a $2.16 drop in world exports and a $0.73 drop in world income. Simulations also suggest that $1 of stimulus spending behind the border can increase a country’s own GDP by $0.64 on average while world trade could increase by $0.08, but the effects on the real GDP of other economies are mixed.

These estimated overall impacts depend critically on the nature of the stimulus. Stimulus measures that discriminate between domestic and foreign goods and firms and sector specific measures are clearly less effective. Measures that are most supportive of both trade and growth are non-discriminatory demand stimulus and labour support. Coordination of stimulus measures ensures that benefits are larger and more widely shared.

Open markets and the restoration of a level playing field will be a necessary condition for a sustained recovery; this means addressing policies with both direct and indirect impacts on trade.

Recommendations

  • Roll back the most trade distorting measures immediately
  • Resist protectionist pressures
  • Bring the Doha Development Agenda negotiations to an ambitious and balanced conclusion
  • Step back from the exceptional measures taken to support trade finance as conditions normalise
  • Remove discriminatory provisions from all stimulus measures
  • Restore competition policy disciplines and withdrawal from the banking sector when the time is judged right, with the international coordination needed to avoid regulatory arbitrage
  • Implement economy-wide demand-side measures to address demand shortfalls and active labour market policies to address unemployment, which are preferable under current conditions
  • Co-ordinate an international “exit” from extraordinary measures as economic conditions permit; further attention is required both to address specific needs in less developed countries and persistent global macroeconomic imbalances

 

Further information:

More detailed analysis on this subject is available in the report:

 Trade, Policy and the Economic Crisis (pdf, 318 KB)

 

See also:

 Trade and the economic recovery: why open markets matter

 How imports improve productivity and competitiveness

 

 

 

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