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World Trade has been a casualty of the global crisis

Pascal Lamy, director-general of the World Trade Organisation recently gave a speech in Brussels at which he explained the deterioration in world trade over the past year.

He said: “These are not easy times. We know that in 2009, growth of real world GDP was negative, estimated at -2.2 per cent. Furthermore, the global unemployment rate reached its highest level ever, with the International Labour Organization estimating the number of jobless worldwide at over 200 million. The adverse impact of the recent financial crisis on the world economy in terms of output and employment is undeniable.

“World trade has also been a casualty of this crisis, contracting in volume terms by around 12 per cent in 2009 — the sharpest decline since the end of the Second World War. The main explanation for this freefall in trade has been the simultaneous reduction in aggregate demand across all major world economies. The drying up of trade finance during this period has also been a contributing factor. To a much lesser degree, trade has been adversely affected by some instances of increased tariffs and domestic subsidies, new non-tariff measures and more anti-dumping actions.

World trade declined by about 12% last year.

“We started last year with a collapse in trade, a drying up of trade finance, concerns that donors would reduce funding for “Aid for Trade”, and worries that protectionism would kick in. And yet one year on from the onset of the crisis, we see that, to this point at least, the multilateral trading system has proven its sturdiness as a bulwark against runaway protectionism.

“In most developed economies, including the EU, stimulus packages have been instrumental in preventing further deterioration in output while preparing the path to recovery. The jury is still out though on whether some of the measures introduced to stimulate economies contain provisions that favour domestic goods and services at the expense of imports.

“But the positive impact of national stimulus packages is fleeting and worries are mounting over the huge budget deficits rung up by many governments. Economies urgently need other sources of growth — sustainable engines of growth which will not add to our already seriously indebted economies. This is where trade can be an important part of the story, both in the long-run and in the short to medium-term.

“In the long-run, economic growth is driven very significantly by technological progress and the quality of domestic institutions. Trade has an important role in this context.

“First, it can enhance technological progress by increasing the incentives to innovate, facilitating transfer of technology and fostering “learning-by-doing” effects.

“Second, trade reform may directly increase the quality of institutions by leading to the adoption of certain institutional norms. Moreover, the preferences that underlie such institutional reforms may be the indirect consequence of the workings of market forces associated with trade.

“In the short-to-medium run, trade allows external demand to provide a buffer for economies facing low domestic demand during periods of recovery from the crisis. This is especially important in several developed economies, where domestic demand is likely to be subdued for a while as domestic savings are reconstituted and the financial system recovers. Trade openness vis-à-vis a diverse set of countries is important for mediating the effect of a shock.

“More generally, trade can increase income or output levels through efficiency gains from specialization based on comparative advantages, greater competition, access to a larger variety of intermediate inputs, scale economies and an intra-industry reallocation of resources.

“Moreover, exports, in particular, can increase the levels and growth rates of income or output as they often have a high value-added component. This is especially true in developed countries, where firms specialise in the high value-added segment of the global supply chain. Importantly, the value-added component of exports is likely to have a positive effect on domestic demand due to backward linkages with several sectors in the economy.

“In fact, evidence suggests that the domestic content of value added by exports is higher as countries develop. For example, in 2008, 80 per cent of the value of the goods exported by the US had a domestic content, while this share was only 42 per cent for Malaysia. In addition to the value-added argument, there is evidence of “learning-by-exporting”, which increases productivity and hence promotes growth.”

To read the full speech click here

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Posted in economic growth, GDP, International Trade, Protectionism, unemployment, World Trade, World Trade Organisation

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