The Fallout of the Great Recession for Trade

UPDATE:  This post was picked up by Reuters and internationally syndicated, appearing in papers worldwide over the weekend. From the Reuters article:

Some economists argue globalisation, in the sense of the
increasing integration of different countries in the world economy, is
the cause, acting as a transmission belt from one suffering economy to
the next.

"With globalisation, the world can suffer the central
cost of protectionism -- a deep fall in trade -- without passing any
new laws or regulations," Robert Shapiro, head of progressive think
tank NDN's globalisation initiative, said in a blog.

...

"The crux of it is that as the share
of what the world produces that's traded across borders rises -- 18
percent of worldwide GDP was traded in 1990, compared to 30 percent in
2006 -- a serious recession in a few large places moves quickly around
the world, driving down global trade," said Shapiro of NDN, a former
undersecretary in the U.S. Commerce Department.

In other words weak demand in one country increasingly affects others because they are more dependent on exports.

The new trade data out today show, unhappily, that the surest way to drive down our trade deficit is a deep recession that cuts into the money Americans have to buy imports. In December, the trade imbalance fell to less than $40 billion, a 35 percent drop from its $62 billion level last July. (It’s all seasonally-adjusted). The last time the trade deficit was this low was November 2003. Imports shrank by $74 billion from $230 billion in July to $174 billion in December, or nearly 25 percent. Of course, the same thing is happening to our trading partners: our exports also fell 21 percent, from $168 billion to $134 billion. Since we import so much more than we export, the decline in imports really drives down the overall deficit.

This is a window into something new and important: with globalization, the world can suffer the central cost of protectionism -- a deep fall in trade -- without passing any new laws or regulations. The crux of it is that as the share of what the world produces that’s traded across borders rises -- 18 percent of worldwide GDP was traded in 1990, compared to 30 percent in 2006 -- a serious recession in a few large places moves quickly around the world, driving down global trade. That’s particularly serious for countries that really depend on exports, which means most of the developing world. The global data are still sketchy, but it looks like in the last months of 2008 and the beginning of this year, exports (month-to-month) fell 25 percent in China, 33 percent in Korea, and 40 percent in the Philippines. To see how serious this is, consider that exports represent about 40 percent of GDP in all of those countries. It’s even worse in Taiwan, where exports account for 62 percent of GDP and fell 44 percent rate in November, compared to a year earlier. The other deeply trade-dependent region is Europe, where serious problems coming from this massive slowdown in trade will hit home within the next few months. 

The serious problem which they and others will face is fast-rising job losses by the people who produce the exports and those who make the goods and services that those workers purchase. So, as the world slides into this Great Recession, calls for new forms of protection for export industries are cropping up all over the place. We certainly hear these calls here, even though the United States for decades has been generally more accommodating of our trading partners than they have been toward us. We’ve pressed for more trade liberalization, pressed for it earlier, and stuck with generally low trade barriers and an aggressive global economic footprint more than our major trade partners. Countries like Japan, France and Germany don’t provide a very high threshold on these matters, to be sure, but we have consistently cleared it.  

Yet, here we are today, on the brink of passing a “Buy American” provision that will bar the use of foreign-made manufactured products and goods in many projects supported by the stimulus package. President Barack Obama said he wanted the Senate to dial it back, since he understands that it would invite real retaliation that would injure more export-industry workers. So the Senators added a caveat that the restrictions can’t violate our WTO obligations. Here’s the translation of that: “Buy American” will mainly target developing countries, because Japan, EU nations and other advanced countries are all signatories to WTO agreements to not discriminate against other countries in many areas, including government procurement. China, Brazil, India and most other developing nations are not yet signatories. So, we can expect a good dose of tit-for-tat protection from those countries. And that could disrupt the production networks and supply chains of some of our largest global companies, such as Boeing, Pfizer, Dell and Coca-Cola. At a time of grave economic turmoil and peril, this can’t make any sense.

And we’ll still be vulnerable to legitimate, tit-for-tat from Europe and Japan, since they currently apply lower tariffs in many areas than mandated by the WTO. That means they could raise their tariffs without violating their WTO agreements -- and we could do the same in the next round of retaliation.

The best way to cauterize this drive for protection is to take a deep breath, and make sure that workers have greater means to protect themselves. The Administration is offering some of that, for example in health care benefits for those who lose their jobs. We can go well beyond health care, however, especially in real opportunities for working people to expand or deepen their skills and abilities. That remains a serious gap in the stimulus, which hopefully the first Obama budget can rectify.