Stress Testing the Global Trading System
Stress Testing the Global Trading System
by Sharyn O'Halloran
The global recession has been truly global: we have witnessed an across the board collapse in the demand for goods and services and a worldwide plunge in manufacturing and trade flows. In the last quarter of 2008, global industrial production and exports tanked nearly 60 percent on average.1 All sectors of the economy have experienced sharp declines, albeit it is the developed countries that are being hit the hardest, at least for now. The question is: can the global trading system withstand the stress test of a global economic crisis?
To answer this question, it is important to understand the contraction in economic activity to date. Domestically, the economic crisis is realized in falling resource utilization rates of both capital and labor, leading to manufacturing plant closings and increasing layoffs. The United States, for example, reported an 8.5 percent unemployment rate earlier this year, the highest in 23 years. Globally, the economic crisis is reflected in lead indicators such as new orders showing a continued downward spiral and a steep decline in export demand.
The impact of this economic downturn is perhaps most notable in the effect of export declines on real Gross Domestic Product (GDP). For example, in the fourth quarter of 2008, 14.5 percent of Germany’s reduction in GDP growth was attributed to trade, while Spain experienced an 11 percent decline in GDP growth resulting from slack export demand. Countries most dependent on exports are therefore most exposed to global contractions.2
Emerging markets like China, Brazil and India, whose growth has been almost entirely export driven, have experienced similar stresses. For example, China faced an almost 40 percent decline in 2009 first quarter exports. With some estimates suggesting that nearly 75 percent of the Chinese economy is tied to exports, the impact on the domestic economy has been pronounced.
Given these extraordinary shocks to the world economies, can the global trade withstand the stress? Here we are beginning to see worrisome signs, raising concerns for the sustainability of an open trading system. For example, Mexico announced that it will levy tariffs of 10 percent to 45 percent on at least 90 US products in response to the US scrapping a test program that allowed Mexican trucks to operate beyond a zone along the countries’ border. China plans to file a WTO complaint against the US, claiming that unfair, protectionist measures restrict imports of its chicken meat. Moreover, government subsidies for automakers have proliferated, totaling about $48 billion worldwide, according to the World Bank, raising the prospect of future countervailing duty charges.
On the bright side, the recent Group of Twenty (G-20) meetings in London pledged close to $250 billion in credits to facilitate trade flows. Nonetheless, the World Bank just reported that 17 of the G-20 countries have recently enacted trade barriers.
As in the past, then, during economic downturns pressures for job protection may prove irresistible. To counter these forces, world leaders should adopt a two-pronged approach. The vast majority of consumers in emerging markets are currently unconnected to the world economy. Leaders in these countries need to remedy this situation, while at the same time expanding the social safety net, so as to increase their constituents’ “set points” of consumption and investment. In developed countries, leaders can expand and enhance trade adjustment assistance, making it easier for workers losing jobs in one industry to move to other, expanding sectors. Without these efforts, the open trading system may be one of the first casualties of the global economic stress test.
1 David Hensley and Joseph Lupton. “Trade Played a Key Role in GDP Outcome,” Economic Research Note, February 27, 2009.
2 Ibid, p. 10.
