World in Crisis: Can the trading system still serve the needs of developing countries?

“World in Crisis – Can the Trading System

Still Serve Developing Nations?”

Simon Lacey senior trade adviser (legal)| www.tradelawchambers.co.za

South African Institute of International Affairs

Wednesday April 15, 2009

Structure and Outline of this Presentation

Origins and causes of the global economic crisis Effects on international trade Trade policy reactions by developed and developing

countries Impact on developing countries Efforts to confront the crisis by the G-20 Can the trading system still serve developing countries?

Simon Lacey

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Origins and causes of the global economic crisis (cont’)

Simon Lacey| www.tradelawchambers.co.za

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Origins and causes of the global economic crisis (cont’)

Overall causes of the collapse of the US subprime market The crisis can be attributed to a number of factors pervasive in

both housing and credit markets, factors which emerged over a number of years.

Causes proposed include the inability of homeowners to make their mortgage payments, due primarily to• adjustable rate mortgages resetting, • borrowers overextending, • predatory lending, • speculation and overbuilding during the boom period, • risky mortgage products, • high personal and corporate debt levels, • financial products that distributed and perhaps concealed the risk of

mortgage default, • monetary policy, • international trade imbalances, • and government regulation (or the lack thereof).

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Effects on international trade


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Effects on international trade (cont’)

Double whammy

The global financial crisis which resulted from the collapse of the US subprime mortgage market had a two-fold impact on trade flows:A collapse in demand saw import demand and thus export flows decrease significantlyThe tightening of credit markets worldwide also led to a rise in the cost of trade financing, which consequently had a chilling effect on trade flows


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Collapse in worldwide demand

Demand for houses had tapered off as early as 2007 as mortgage credit began to become more difficult to obtainThe continuing stream of bad news coming from banks, financial institutions, the stock market, and the deterioration in people’s wealth as well as the first job losses that started to beset the financial sector, saw a collapse in demand for other big-ticket items such as cars, but also discretionary consumer spending on items such as electronics and even clothing.Retail sales for Christmas 2007 were marginally weaker than expected but by Christmas 2008, they were markedly below previous yearsBy the end of 2008 car sales had all but collapsed in many developed country markets


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Collapse in worldwide demand (cont’)

Business travel had largely nose-dived by the second-half of 2008, having an impact on the civil aviation and hotel industriesThe collapse in auto sales in developed country markets such as the US and Europe had severe knock-on effects both for their domestic auto industries but also much further afield in markets such as Japan, where Toyota announced its first ever corporate loss for the 2008 financial yearThe downturn in demand for electronics and consumer goods had severe knock-on effects in markets such as China, where many workers returning home for the Chinese new year in January 2009 were told not to bother coming back to work afterwardsEven goods with relatively inelastic demand, such as textiles, saw a huge slowdown in trade flows, with factories in places such as India, Bangladesh, Cambodia, and China, being forced to lay off workers en masse.


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Chilling effects on trade financing

Trade is built on trust – that the goods you pay for will turn up; that the goods you send to market will be paid for.But the fact that so many traded goods are shipped across continents and that shipment can take days or weeks to arrive raises some problems about payment.How can sellers ensure a buyer will pay on time, or indeed at all, and what do they do for cash in the meantime?A buyer's potential headaches include whether the right goods will turn up in the right port, and at the right time In addition, the applicability of different national laws and currencies, with the inherent exchange-rate risks, work together to compound the underlying hazards involved in international trade transactions.


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Chilling effects on trade financing (cont’)

Over 90 percent of all trade transactions involve some sort of short-term credit financingTrade finance is widely considered one of the most secure modes of financeThe loans have a short maturity, their execution is relatively routine, and the traded goods themselves can serve as collateral.


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Chilling effects on trade financing (cont’)

Since the Asian financial crisis in the late 1990s the supply of trade finance has become extremely sensitive to liquidity squeezes, such as the current sub-prime mortgage crises.The international financial crisis affects trade financing in two main ways:

- First, the crisis exacerbates a shortage of liquidity to finance trade credit: the gap between supply and demand in trade financing was estimated at US$ 25 billion at the end of 2008

- Second, the credit crunch and economic slowdown have made banks averse to financial risk.

Put another way: "Nothing is moving because the trader doesn't want to take the risk of putting cargo on the boat and finding that nobody can pay"


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Trade policy reactions by developed and developing countries


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Trade policy reactions by developed and developing countries (cont’)

A rise in protectionism

To date, the WTO Director General Pascal Lamy has released two reports on the rise in protectionism, in January and then in March 2009

The reports document a broad array of measures being implemented by many countries, both developed and developing, to restrict imports and provide relief to domestic, import-competing industries

In developed countries, many of the measures have been part of stimulus packages containing bail-out plans involving massive cash injections for domestic industries, particularly the auto industry (jobs, industrial base, systemic importance in terms of downstream components suppliers), as well as, of course, their banking industries (systemic importance for the flow of credit)

There was also a corresponding rise in contingency protection measures in developed country markets such as the US and the EU, as well as developing countries such as India and Argentina, as import competing industries turned to their governments for import relief


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A rise in protectionism (cont’)

In developing countries in particular, as job losses and economic hardship began to be felt, governments also came under pressure to provide import relief from domestic producers of import-competing products, either by using traditional means such as raising applied tariff levels to or close to bound rates, the application of contingency protection measures or by more stringent application of other barriers, such as technical barriers to trade, sanitary and phytosanitary measures, import licensing etc.

In some developing countries there was also another imperative behind efforts to restrain imports, namely the need to provide relief to deteriorating balance of payments situations, and relieve pressure on already stretched budget deficits.


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Examples of measures in developed countries

The following developed countries enacted bail-out programs of one kind or another for their financial sectors:- Australia, Austria, Belgium, France, Luxembourg, Canada, Denmark,

Finland, Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States.

The following developed countries enacted bail-out programs for their auto industries- Austria, Japan, Portugal, Spain, Canada, the United States

The following developed countries enacted stimulus packages- Australia, Canada, France, Germany, Hong Kong, Luxembourg, New

Zealand, Chinese Taipei, United Kingdom, United States


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Examples of measures in developed countries Other measures worth noting by developed countries

- Canada - Imposition of antidumping duties or initiation of antidumping investigations by on various industrial products from China

- EC - Reintroduction of customs duties on imports of certain cereals; Antidumping duties on imports of certain iron or steel fasteners from China; Definitive antidumping duty on imports of certain plastics sacks and bags originating in China and Thailand.

- Chinese Taipei - Imposition of a volume-based special safeguard for dried day lilies; Imposition of a volume-based special safeguard for other liquid milk; Schools and colleges encouraged to buy local products. Local labour and local products to be given priority in construction projects.

- United States -Omnibus Appropriations Act 2009 (H.R. 1105) establishing that "none of the funds made available in this Act may be used to establish or implement a rule allowing poultry products to be imported into the United States from the People's Republic of China; Same legislation which cancels funding for a test programme by the US Department of Transportation which allowed cross border trucking services with Mexico.


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Examples of measures in developing countries

The following developing countries enacted bail-out programs of one kind or another for their financial sectors:- Brazil, Jamaica, Korea, Latvia, Malaysia, Panama, Russian Federation,

Trinidad and Tobago

The following developing countries enacted bail-out programs for their auto industries- China, Malaysia, Morocco, Romania

The following developing countries enacted stimulus packages- Brazil, China, Dominican Republic, India, Jamaica, Korea, Malaysia, Peru,

Russian Federation, Turkey, Uzbekistan


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Examples of measures in developing countries Other measures worth noting by developing countries

- Argentina - Introduction of non-automatic import licensing requirements, covering products such as: textiles, steel, metallurgical products, and tyres; Introduction of reference price covering around 1,000 imported products considered sensitive (i.e. auto parts, textiles, TV, toys, shoes, and leather goods)

- China - Import ban on Irish pork; Antidumping investigation on industrial-grade acid from Thailand and Republic of Korea;

- Ecuador - Tariff increases on 630 tariff lines covering a wide range of goods, with a view to restore balance-of-payments

- India - Introduction of licensing requirements for imports of certain steel products and auto parts;

- Indonesia - New licensing, reporting, and pre-shipment inspection requirements on over 500 goods (food and beverages, toys, electronics, footwear, and garments).


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Impact of the crisis on developing countries


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Impact of the crisis on developing countries (cont’)

The global economic crisis has affected developing countries in a number of ways

The tightening of liquidity has affected their access to global credit markets as it has for many medium income countries

Many lower income country governments rely dis-proportionately on revenue from commodity exports, the prices of which have declined sharply along with global demand

These countries have subsequently come under intense fiscal pressure, particularly those with no access to private capital markets which must, if they are to protect core spending, look to overseas development assistance and concessional borrowing to fill financing gaps


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With developed country governments coming under increasing budgetary pressures to finance bail-out and stimulus measures, the availability of funds for overseas development assistance to needy lower income countries becomes constrained

Some of the sectors hardest hit by the global economic downturn, such as shipping and construction, are the source of billions of dollars in remittances from migrant workers in developed countries to their families in developing countries. These remittance flows have now been heavily curtailed, increasing economic hardship at home


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The drop-off in demand in manufactured goods has hit developing countries hardest, since much of the world’s manufacturing output is sourced in these countries, thus sectors such as textiles, footwear, and low-cost electronic goods, located almost uniquely in developing countries have seen thousands of job losses

The economic growth models of many developing countries and particularly lower income countries are heavily reliant on exports over domestic consumption, and thus they are particularly vulnerable to any contraction in demand for their exports


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Efforts to confront the crisis by the G-20

To date, the G-20 have met twice in order to agree on combined measures to address the global economic crisis, once on November 15, 2008, in Washington, D.C.; and again, on April 2, 2009, in London.


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Efforts to confront the crisis by the G-20 (cont’)

Outcomes of the 2008 Washington summit

The White House reported that the summit had reached what would be known as the Washington declaration.

The five key objectives the leaders agreed upon were:- reached a common understanding of the root causes of the global

crisis; - reviewed actions countries had taken and would take in the future to

address the immediate crisis and strengthen growth;- agreed on common principles for reforming their financial markets; - launched an action plan to implement those principles and asked

ministers to develop further specific recommendations that would be reviewed by leaders at a subsequent summit;

- and reaffirmed their commitment to free market principles


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Outcomes of the 2008 Washington summit (cont’)

In the context of the international trading system the G20 agreed in Washington to two outcomes:- A standstill on the enactment of new protectionist measures and

policies by refraining “from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports”

- Striving to reach an agreement on modalities so as to be able to conclude the Doha Round, stating that “We instruct our Trade Ministers to achieve this objective and stand ready to assist directly, as necessary”.

Finally leaders at the summit agreed to meet again before the end of April 2009, “to review the implementation of the principles and decisions agreed today”


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Efforts to confront the crisis by the

G-20 (cont’)

As promised, the G-20 met several months later, on 2 April 2009, in London.


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Outcomes of the 2009 London summit

Leaders agreed in a document entitled “Global plan for recovery and reform” a $1.1 trillion package of measures intended to restore growth and jobs and rebuild confidence and trust in the financial system, including:- an additional $500bn for the IMF $250bn in International

Monetary Fund Special Drawing Rights available to all IMF members; and

- a trade finance package worth $250bn over two years to support global trade flows

- At least $100bn of additional lending by the Multilateral Development Banks


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Outcomes of the 2009 London summit (cont’)

In terms of the global trading system, leaders in London made a number of statements:- Reaffirming their commitment to a standstill in the enactment of

protectionist measures and extending this standstill until the end of 2010

- Promising not to “retreat into financial protectionism” and to refrain from measures that “constrain worldwide capital flows, especially to developing countries”

- Affirming that they would notify the WTO of any such measures they enacted as well as committing to a quarterly review of these measures

- Reaffirming their commitment to reaching “an ambitious and balanced conclusion” to the Doha Round.


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Can the trading system still serve developing countries?


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Can the trading system still serve developing countries?

Without delving on the suitability or practicability of many of the commitments undertaken at the Washington and London summits towards solving the fiscal and budgetary challenges developing countries currently face as a result of the global economic crisis, the question remains whether the WTO, and the multilateral trading system it oversees, still hold reasonable promise in terms of development friendly outcomes for developing countries.


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Can the trading system still serve developing countries? (cont’)

The Doha Round was only launched after developing countries were reassured that it would be all about their interests, and the Round was even named the Doha Development Round.

The word “development” appears some 36 times over the course of the 10-page Ministerial Declaration which formally sets out the Round’s work program.

Developing countries have scored some victories in the eight years since the Round has been ongoing, including the jettisoning from negotiating mandate, of a number of newer issues they were hostile to (trade and investment, trade and competition, transparency in government procurement), as well as securing various Aid for Trade commitments from developed countries.

If the Round were to be concluded more or less with what has been agreed up to now, it would still achieve a considerable degree of trade liberalization, at least locking in much of the (unilateral) liberalization that has ensued since the end of the Uruguay Round.


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Can the trading system still serve developing countries? (cont’)

Whereas some developing countries, such as Brazil, India, and to a certain extent China, have been relatively vocal in pressing for the consideration and inclusion of their needs in any final settlement, many other developing countries need to become more proactive

The fact that e.g., the cotton initiative (involving Benin, Burkina Faso, Chad and Mali on the one hand, and the United States on the other) was the last point to be considered on the negotiating agenda last July, when WTO Members had previously promised that it would be handled “ambitiously, expeditiously and specifically” was, in my view, a failure of developing countries to hold the US to task and have this issue accorded a higher priority on the agenda

Despite the fact that developed countries seem to wield considerable influence at the WTO, the truth is that it is the WTO, of all the institutions of the global economic architecture, which affords developing countries the best chances of having their views heard and their needs considered.


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Over to You

Questions and Commentary from the

Floor


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“World in Crisis – Can the Trading System Still

Serve Developing Nations?”

Cape Town, April 15, 2009| www.tradelawchambers.co.za

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World in Crisis: Can the trading system still serve the needs of developing countries?