Future of Trade

Economist  joins in the discussion with yet another piece on whether China can consume more to save the world. Can China reduce its trade surplus to consume more & rebalance the world economy?

The article analyses the prevalent argument of high savings in China (the composition of savings is more corporate vs households; urban vs rural savings) and why consumers might not be able to spend more  (proportion of national income going to households as wages & investments vs corporate profits).

So, can the Panda chew on more?

HBR posted a recent commentary on whether globalization has come under fire during this crisis.

Of all the trends we followed before the crisis, globalization seemed the most secure. Today, however, big and important question marks hang over some aspects of global economic integration.

The past decade-and-a-half has witnessed a level of global integration unseen since before World War I (and arguably in history). Between the early 1990s and the current downturn, global GDP grew at robust rate–roughly 5% nominal GDP growth per year. Yet, trade flows grew nearly one-and-a-half times faster, while capital flows grew at twice the rate. The advent of viable undersea fiber networks in the late 1990s created the first real-time global data networks ever, unleashing a torrent of global information flows. In the last 2 decades, more than 200 free-trade treaties were signed, tariffs fell to unprecedented lows, and countries like China and India, after years of relative isolationism, engaged much more vigorously in the global economy.

In short, the world economy became fundamentally more interconnected and interdependent. The big question now is: Will the pendulum swing back?  [more]

Niall Ferguson and James Fallows debate the statement by Zhou Xiaochuan, head of China’s central bank, calling for the replacement of the dollar as the dominant world currency with the creation of an international reserve currency.

One man’s V is another man’s W. Let’s all hope and pray that the Obama Administration’s bet on not having another round of stimulus to avoid raising borrowing costs and investment in healthcare to boost consumption will all EVENTUALLY pay off.

Article: http://www.project-syndicate.org/commentary/roubini15

Hi everyone, check this out.

World trade is no longer collapsing and fears of rampant protectionism have not been realised.

THE worst global economic slump since the Depression has generated reams of mind-boggling numbers. Among the starkest—and the most worrying—have been measures of world trade. According to the World Bank, the dollar value of trade is about a third lower than it was a year ago. Barry Eichengreen, an economic historian at the University of California, Berkeley, estimates that trade has contracted by more in this crisis than it had at a comparable stage of the Depression (see article).

Lately the news has been more encouraging. Trade is far from booming, but it has at least stopped declining. The World Bank even detects “hints of an uptick” in early data for June. Bernard Hoekman, director of the bank’s international trade department, has “little doubt that the decline in trade has bottomed out”.

Whether global commerce makes a speedy and lasting recovery depends, in the first place, on how quickly and sustainably global demand picks up. But it also depends on two other factors.

One is the reason why trade slumped so badly at the turn of the year. If the main culprit was the drop in global demand, as most economists believe, trade should recover smartly when demand picks up. But if it was an increase in protection, trade will be slow to emerge from the doldrums. Such measures, as past crises show, are easier to put in place than to remove.

The second is global trade politics. Governments will continue to be under pressure to erect trade barriers as unemployment continues to rise and as their room for more fiscal and monetary expansion becomes cramped. Leaders of the world’s biggest economies have repeatedly promised to conclude the Doha round of trade talks, which have already dragged on for more than seven years and been near to death several times. In doing so, they have set themselves an important test.

A hole in the hull

Compared with a year ago, the state of trade is dire. According to the World Bank, the dollar value of exports in the 48 countries for which final data for May are available was still about one-third lower than in May 2008. However, year-on-year data mask recent changes (see chart 1). Month-on-month figures point to a dramatic slump at the turn of the year, but stability since. The bank reckons that the average value of exports (for 44 economies accounting for three-quarters of world trade) dropped by 15.4% in November, held steady in December and plunged by 12.2% in January before flattening out.

The precipitate drop in trade—far more marked than anything that has happened to global GDP—was caused in part by the way production is now organised. Trade has always been more than proportionally affected by fluctuations in output, but the globalisation of the supply chain has increased its responsiveness. Stages of production that were once local are now much more likely to be carried out abroad. Douglas Irwin, of Dartmouth College, estimates that in the 1960s and 1970s, if global GDP increased (or decreased) by 1%, trade would grow (or shrink) by about 2%. In the 1990s, the change in trade was 3.4%.

In recessions, according to a new paper by Caroline Freund of the World Bank, trade contracts even more sharply than it responds in easier times. Using data from the global downturns of 1975, 1982, 1991 and 2001, Ms Freund finds that whereas real income growth was, on average, 1.5 percentage points lower than its pre-recession rate, trade growth stumbled by 7.2 points, or nearly five times as much.

Several reasons why trade should decline so fast in recessions suggest themselves. It could be that, anticipating a sudden slowdown in growth, firms draw down accumulated inventories sharply, causing a rapid contraction of trade. But it is also possible that during downturns governments turn to protectionist policies, heightening the responsiveness of trade to a fall in demand.

Broadly speaking, the timing of the collapse and stabilisation in trade flows, as well as the sectoral and geographical pattern of the decline, suggest that demand and destocking, rather than a retreat into protection, are the chief causes. The World Trade Organisation (WTO) points out that America, which was the first big economy to enter recession, also saw the sharpest contraction of imports last year (see chart 2). Data for America and Japan show that trade in non-durable consumer goods like clothes and food, for which a basic level of demand persists and purchases of which cannot be put off for as long as those of bigger-ticket items, has declined least among main product categories. Exporters specialising in capital goods and durables, such as Germany, have been hit harder than others. And even for cheap non-durables, the early falls were the sharpest, suggesting that retailers were furiously running down their inventories.

Differences in the trends of goods and services trade also support the destocking thesis. Aaditya Mattoo and Ingo Borchert, economists at the World Bank, point to the relative resilience of trade in services, which unlike goods cannot be stored and are therefore immune to the inventory effect. In April America’s imports of goods were 34% lower than a year earlier. Its exports were 27% lower. Both imports and exports of services, however, were down by only 10%. Imports of business, professional and technical services (including information-technology services outsourced to places like India) were 4% higher in the first quarter of 2009 than a year earlier.

The WTO has analysed trade policies as well as trade flows. There have been several instances of countries raising tariffs, within the limits of their WTO commitments. America, the European Union and Switzerland have all introduced new farm subsidies (or restarted programmes that had been allowed to lapse). The number of anti-dumping cases initiated by WTO members rose sharply in 2008, from a 12-year low in 2007, and continued at a high rate in the first quarter of this year.

Other measures, especially when carried out by sub-national governments (counties and states), are less explicit. Local-procurement provisions attached to several stimulus packages, including America’s and China’s, are intended to favour domestic suppliers over foreigners. Sectoral subsidies, particularly to carmakers, have often come with pressure to ensure that any job cuts take place abroad, not at home.

But changes in trade policy have not all gone one way. Several countries, from Australia and China to Ecuador and Paraguay, have moved in a liberal direction, reducing import duties or removing non-tariff barriers since the beginning of March. Chad Bown, an economist at Brandeis University, points out that the total value of trade targeted by the flurry of new anti-dumping actions is small: less than 0.45% of the total value of G20 countries’ imports.

All this is fairly reassuring. The bottoming-out of trade reflects a slowing of the decline in the world economy. Destocking may have run its course. Given its responsiveness to output, a lively rebound in trade is not inconceivable. Meanwhile, protectionism has not run riot.

But caution is still needed. Several big economies are being supported by expansionary fiscal and monetary policies, which will eventually have to be unwound. Recovery is likely to be sluggish. Unemployment will probably continue to rise—by between 21m and 50m this year, according to the International Labour Organisation. With monetary and fiscal stimulus already near their limits, trade barriers may seem a tempting way to protect jobs. Some countries could raise tariffs substantially without breaking WTO rules. Or stricter buy-local provisions, say, could squeeze trade.

The road back to Doha

This is why the politics of trade—not least the prospects of completing the Doha round—remain important. Some of the round’s doubters have questioned its value because it promises no substantial further reductions in actual tariffs, merely aiming to limit countries’ scope to raise them. The World Bank’s Mr Hoekman is more optimistic. Countries realise that open markets cannot be taken for granted, and few of them want to be seen to fall foul of their international commitments. This makes the “insurance” aspect of the Doha round more attractive than it was just a few months ago.

But the crisis has also revealed the limitations of existing multilateral norms. WTO rules on public procurement do not restrict the ability of local governments to discriminate against foreign suppliers. Countries that have not signed the WTO Agreement on Government Procurement are free to pursue discriminatory policies. This leads Mr Hoekman to argue that another benefit of concluding Doha will be that it will open up the scope for negotiations to establish rules of the game in areas such as international financial sector regulation, government procurement and services trade, where the crisis has revealed scope for protectionism.

Unfortunately, a successful conclusion to the round is still far from certain. The last attempt collapsed in July 2008, when India insisted on more protection for its farmers against sudden surges in imports than America was willing to accept. For all the good intentions of world leaders, hope therefore rests largely on Ron Kirk, America’s new trade representative, and Anand Sharma, India’s new commerce minister, finding common ground. The two have already met several times. Mr Kirk has spoken of the need to conclude Doha in a way that is “balanced and ambitious”. Mr Sharma has stressed that he has a mandate from his prime minister to sign a global trade deal.

But since his appointment, Mr Kirk has focused mainly on the enforcement of existing trade rules. His latest policy speech, at a steel plant in Pittsburgh, concentrated on detecting violations of labour standards by trading partners and promises to resort to legal action if necessary. Gary Hufbauer, of the Peterson Institute for International Economics in Washington, worries that a “fusillade of cases will set Doha back”.

Some argue that by demonstrating that his resolve to a worried domestic audience, Mr Kirk may find it easier to get the authority he needs to negotiate Doha. Those who are hoping for the trade talks to reach a successful end can only hope that this reading is correct. If it is not, an agreement may be no nearer.

URL Source: http://www.economist.com/PrinterFriendly.cfm?story_id=14082950

Here’s a nifty piece on generational differences in terms of economic values and outlooks.

The Generation M Manifesto
Dear Old People Who Run the World,

My generation would like to break up with you. Everyday, I see a widening gap in how you and we understand the world — and what we want from it. I think we have irreconcilable differences. [more...]

I put up Pulses article on the futuresgroup wordpress blog here. Some takeaways are …

Competition from other ports rising on intra-Asia trade – 8 of top 10 container ports inAsia. E.g Guangzhou and Shenzhen overtaking HK. Shift in trade patterns with sharp-rise in intra-Asian trade. This should benefit SGP due to strong feeder network, but due to low demand and oversupply of port facilities, this will lead to cost competition/price war which SGP would come out poorly.

New ports from new trade patterns – India and ME trade patterns rising, Sri Lanka’s Colombo port is a more natural transshipment hub than SGP. Increased China-US could see more mainline services going directly on transpacific trade, reducing transshipment through SGP.

Too much trade volume – Rising intra-Asia trade may be so high that container lines choose to serve ports with mainline services going directly from point to point in Asia, rather than through feeders as now. Long running hub-spoke vs distributed angst here. But add in China Shipping Lines hmmm…

Help regional neighbors to improve – this boosts volumes which in turn could feed into SGP. PSA has done this with terminals in Kolakata etc in India, Tianjin etc in China. But this is different from regional challengers BKK (air logistics), HK/Southern China (China hub). Recently Fedex has moved its hub from Subic in Philippines to Guangzhou, DHL is entrenched in HK. How do you balance the rise of challengers in giant markets China, Indochina with the stability/security etc SGP offers?

Institutional arrangements are responsible for the policy agenda that gets shoved through the policy window, and so too will they play a critical role in shaping the future geography of trade. The threads of vested interests woven into the fabric of international trade will determine both its strength/ fragility and design (perhaps wharped by protectionist or mercantilist tendencies or influenced/ forced into harmony by the weaver (and who would that be?)). BRIC (Brazil, Russia, India, China) is the latest institutional formation to join the family of the G(roup)s and how their influence will play out in the international arena depends much on their ability to compensate for one another’s deficiencies and compromise on their private agendas.

Goldman Sachs’ take on BRIC (can’t possibly leave out Jim O’Neill in this blog): http://www2.goldmansachs.com/ideas/brics/index.html

On BRIC’s incompatibility: http://www.foreignpolicy.com/story/cms.php?story_id=5011 , http://www.reuters.com/article/businessNews/idUSLE11928120090614?feedType=RSS&feedName=businessNews&pageNumber=1&virtualBrandChannel=0

On BRIC’s multipolar world order: http://www.timesonline.co.uk/tol/news/world/us_and_americas/article6514737.ece

On BRIC’s unease with the dollar: http://news.bbc.co.uk/2/hi/business/8101154.stm

On India’s capitalists: http://www.bbc.co.uk/worldservice/documentaries/2008/09/080905_desert_capitalists_one.shtml

On China in Africa: http://www2.lse.ac.uk/LSEMagazine/pdf/Summer%202009/RaisingTheRedLantern.pdf

As the US sub-prime debacle transformed into a full-blown economic crisis and marked the demise of free market capitalism yet again, the somewhat fanatic move towards state capitalism reeked of familiarity. The last time we saw something similar was during and after the Great Depression when tumbling stock markets and the ensuing economic turmoil worldwide prompted many to wonder if Adam Smith’s invisible hand had really guided them towards economic prosperity and growth or something more sinister. The temporary solace was found in Keynesianism – a sort of state-managed capitalism, if you will – which ultimately gave way to statism – a full-fledged state-operated economy, with massive consequences (one that resulted in WWII). Extremism appears to find its way into the economy whenever a huge, irreversible event affecting the lives of billions of people across the globe occurs. While we worry about all the ‘buy America’, ‘buy China’ and ‘buy ‘Country X’’ clauses that governments worldwide are relentlessly pursuing, the greater worry is perhaps as Joseph Stiglitz puts it plainly, a fear that developing countries might learn the wrong lesson and turn away from markets totally and head towards the disastrous path of state planning and socialism, interpreting what’s happening in the US as conclusive evidence that free market capitalism, represented by the deregulation and privatization of sectors and firms and trade liberalization, is no doubt the embodiment of economic colonialization. The role of ideas may be abstract but it is no less significant as the actions that were informed by it.

Joseph Stiglitz on the role of ideas: http://www.vanityfair.com/politics/features/2009/07/third-world-debt200907

On ‘Buy America’: http://www.ft.com/cms/s/0/e36fa92a-6057-11de-a09b-00144feabdc0.html?nclick_check=1

On ‘Buy China’: http://www.rgemonitor.com/globalmacro-monitor/257223/wto_looking_closely_at_chinese_trade_restrictions

On US trade policy: http://www.rgemonitor.com/piie-monitor/257188/obama_needs_to_be_bold_on_trade

On the Great Depression: http://news.bbc.co.uk/2/hi/business/7656949.stm

On the US sub-prime and current crisis: http://www.bbc.co.uk/worldservice/documentaries/2007/12/071227_debt_threat_1.shtml

MILAN – What can we expect as the world’s economy emerges from its most serious downturn in almost a century? The short answer is a “new normal,” with slower growth, a de-risked and more stable core financial system, and a set of additional challenges (energy, climate, and demographic imbalances, to name a few) with varying time horizons that will test our collective capacity to improve management and oversight of the global economy.

Lower growth is the best guess for the medium term. It seems most likely, but no one really knows. The financial crisis, morphing quickly into a global economic downturn, resulted not just from a failure to react to growing instability, risk, and imbalance, but also from a widespread pre-crisis inability to ”see” the rising systemic risk.

These defining characteristics will condition the responses and the results in coming years. There are countervailing forces. The high-growth countries (China and India) are large and getting larger relative to the rest. That alone will tend to elevate global growth compared to the world where industrial countries, and the US in particular, were in the growth driving seat.

The current crisis has come to be called a “balance-sheet recession” of global scope and tremendous depth and destructive power because of its origins in the balance sheets of the financial and household sectors. Extreme balance-sheet destruction is what made it distinctive.  In the future, central banks and regulators will not be able to afford a narrow focus on (goods and services) inflation, growth, and employment (the real economy) while letting the balance-sheet side fend for itself. Somewhere in the system, accountability for stability and sustainability in terms of asset valuation, leverage, and balance sheets will need to be assigned and taken seriously.

Financial re-regulation should and will emphasize capital, reserve, and margin requirements; limiting systemic risk buildup by constraining leverage; eliminating fragmented and incomplete regulatory coverage and regulatory arbitrage (a huge challenge internationally); and a focus on transparency. Isolating and further constraining a portion of the banking system, so that the channels of credit intermediation are less prone to complete and simultaneous breakdown, also seems likely.

Relative to the recent past, the cost of capital will increase, debt will be more expensive and less ubiquitous, and risk spreads will not return to pre-crisis compressed levels. Assets bubbles will not disappear, but they will be less likely to be turbocharged by leverage.

American consumers will save more and spend less, abandoning the pattern of the last few years. The large hole (on the order of $700 billion or more) in global aggregate demand will have to be filled over time by a compensating increase in consumption in surplus economies, such as China and Japan. The longer this takes, the greater the incentives at the national level to capture a share of global demand via protectionist measures.

The recent increase in protectionist measures is an understandable political price for a range of stimulus packages in advanced and developing countries. But such measures may increase – and will be harder to phase out over time – in the context of a shortfall in aggregate demand.

This is the forward-looking version of the global imbalance issue. Its resolution via coordinated policy action (or a failure to resolve it through such action) will have a huge impact (for good or ill) on the multinational incentive structure surrounding the global economy – and hence on its likely growth.

Responsibility for overseeing the global economy is passing rapidly from the G-7/8 to the G-20, as it should. The latter accounts for 90% of global GDP and two-thirds of the world’s population, so this shift is highly desirable – indeed, essential.

But there is a risk that the interests of the remaining one-third of the world’s people (and the majority of the small countries) will not be adequately represented as the international architecture for managing the global economy evolves.

In the current crisis, a substantial fraction of countries outside the G-20 are essentially defenseless: small relatively poor economies, no fiscal capacity for stimulus, and inadequate reserves to offset the capital outflows that occurred to shore up damaged balance sheets in advanced markets. Within the G-20 countries, there are mechanisms that attend to the interests of the most vulnerable citizens. In the global economy, the most vulnerable are whole countries. Inattention to their interests is not just a moral issue, but a potentially explosive social and economic one.

As a result, the world’s international economic institutions will need to be strengthened in terms of governance and resources so that they can act as circuit-breakers in the event of future financial and economic turbulence. Entering the crisis, the International Monetary Fund was underfunded, and it continues to lack credibility and trust in certain systemically important parts of the world. It is now in the process of being better funded, but we are eight months into a crisis in which international capital flows became volatile and were driven largely by emergency responses rather than underlying economic fundamentals.

Thus, there remains the central question of trust and confidence in the system, which have been badly damaged and will take time to rebuild. At the moment, the majority view in most countries is that the financial system failed badly, but that the incentives and dynamics of the broader market-based system in a relatively open global architecture remain the best avenues for wealth creation, poverty reduction, and the expansion of opportunity. There are, of course, dissidents, and the balance could shift quickly. It is not inconceivable that the baby will be thrown out with the bath water.

There is no magic bullet for today’s crisis. Pragmatic, steady progress at the national and international levels in improving the regulatory architecture and increasing our collective ability to avoid non-cooperative behavior and suboptimal equilibria, is the best course to follow. It is the course we are on. But for now, it is a journey without a clearly defined, widely accepted endpoint.

URL Source: http://www.project-syndicate.org/commentary/mspence2