As global leaders of the G20 convened in London this week to save the world – or at least talk about it – the scale of the crisis confronting them was thrown into sharp relief. The Organisation for Economic Co-operation and Development (OECD) warned that the world economy is suffering “the deepest and most synchronised recession in our lifetime” and is set to shrink by 2.75% this year. A major reason is the “free fall” in world trade volumes, which it expects to slide by more than 13%, the worst drop since the 1930s. Volumes were growing by 6% a year between 1990 and 2008.
In January, 37 countries saw exports decline by more than 25% year on year in dollar terms, reports the World Bank. According to Holland’s CPB Institute, trade volumes shrank by an annualised 41% between November and January. A slump in world trade, greatly exacerbated by a protectionist spiral, accompanied and deepened the Great Depression. This time, “we are already seeing creeping protectionism”, said World Bank President Robert Zoellick.
The danger is growing
Plummeting global demand is still the main cause of the trade slump, and it has been exacerbated by a shortage of trade finance due to the credit crunch: 90% of global trade relies on some form of credit or guarantee. But according to the World Bank, since the G20 last met in November, 17 of them have restricted trade. Russia has slapped tariffs on sugar, while India has raised tariffs on steel and banned Chinese toys. China has banned Irish pork imports. Western subsidies, notably to the auto industry, have jumped and fiscal packages have discriminated against foreign products.
What next?
One reason to hope it won’t get worse is increasingly global supply chains, said Lex in the FT. Even companies focused on home markets are “more dependent on imported inputs than ever before”. So raising tariffs could also harm domestic producers. It’s encouraging to note that the Brazilian private sector has insisted on import controls being removed.
Still, “interdependency is a slender reed”, said The Economist. At some point, protectionism will cause supply chains to break down. Even small rises in tariffs (most countries are below the legal limits stipulated by the World Trade Organisation), along with other forms of protection, could well take us past this threshold. Instead of “a full-blown trade war”, there could be “death by a thousand cuts”. Meanwhile, political pressure to protect domestic economies is only going to increase. There were widespread protests against America’s Smoot-Hawley bill, which massively hiked tariffs and sparked a trade war in the 1930s, noted Lex. Yet it still passed. Free traders everywhere “cannot drop their guard”.