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Trade Effects of the Global Financial Crisis

Alexandra Lull and Ava Geupel

Alexandra Lull

on 19 December 2012

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Transcript of Trade Effects of the Global Financial Crisis

photo credit Nasa / Goddard Space Flight Center / Reto Stöckli Alexandra Lull and Ava Geupel Global Financial Crisis and International Trade 10 potential causes of the Global financial crisis Importance of Trade Exports of goods/services provide the main vehicle for countries to generate the foreign exchange necessary to pay for imports and to repay international debt
Comparative advantages - better allocation of resources and increased efficiency and production
Raises GDP
cheaper products give consumers more expendable income
deficit in a country's balance of trade also tends to depress the value of its currency
creates jobs and increases standards of living
Promotes innovation and competition - companies want to develop better products, while maintaining low prices and increased quality to retain/increase market share
Fosters economic freedom Trade Impacts in USA Implemented the Buy American Provision within the American Recovery and Reinforcement Act

Applied countervailing duties (CVDs) on a variety of products
- Steel rods, sodium nitrate etc.

Bailed out struggling domestic companies such as GM
- internationally denounced as protectionist measure

Increased regulations of trade with China
- Set anti-dumping duties on Chinese Solar imports
- Imposed tariffs on Chinese tires •Stimulus measures taken to rescue sectors of systemic importance (such as banking) or to preserve jobs (as in the automobile industries) or to stimulate growth (such as consumption tax reductions) or “buy national” measures may have been more significant in terms of their potential impact on trade than direct trade policy measures
•Direct trade restricting measures have the most strongly negative impacts on both trade and growth:
USD 1 increase in tariff revenues results in a USD 2.16 drop in world exports and a USD 0.73 drop in world income. Trade Impacts in Developing Countries Concerned over rise of “financial protectionism” (nationalistic change in the banks' lending behavior)
Combination of the global economic slowdown, fragile banking and securities sectors, tighter lending standards, increased capital reserve requirements, plus government pressures on banks to lend more domestically rather than overseas may shrink the amount of capital available for emerging and developing nations
Fear that U.S. Treasury borrowing could crowd out borrowers from countries also seeking to cover their deficits
Exporters of foreign brand name exports (like China) concerned with declining private flows of investment capital as producers face rising inventories and excess production capacity
Why build another factory when existing ones sit idle? 1& 2) Beginning in the 90s:
Credit bubble in the U.S. and Europe and a sustained housing bubble in the U.S.
3) Excess liquidity, rising house prices, and an ineffectively regulated primary mortgage market -->
Increase in nontraditional mortgages that were often deceptive, confusing, and impossible for borrowers to pay off
4) Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets.
5) Managers of many large and midsize financial institutions amassed enormous concentrations of highly correlated housing risk
6) Risk was amplified by holding too little capital relative to the risks and funded these exposures with short-term debt.
7)These risks within highly leveraged, short-funded financial firms with concentrated exposure to a collapsing asset class led to several firm failures.
Some firms had large counterparty credit risk exposures, and the sudden and disorderly failure of one firm risked triggering losses elsewhere --> risk of contagion
8) There was a common shock
firm failures at same time triggered by housing bubble burst
9) Rapid succession of 10 firm failures, mergers and restructurings in September 2008 caused a financial shock and panic.
10) Confidence and trust in the financial system evaporated. US and European firms put into question
The financial shock and panic caused a severe contraction in the real economy March 2009:
World Trade Organization Director-General Pascal Lamy:
Members of the WTO showing a “worrying tendency toward increased trade protectionism as a result of the deepening global economic crisis.”
WTO had identified 85 verified trade measures imposed by 23 countries between September 2008 and March 2009
The large majority were trade-restrictive, although some were in the direction of trade liberalization. Fall of Lehman Brothers 4th largest US IB at the time (25,000 employees worldwide)
September 15, 2008: filed for largest bankruptcy in history
$639 billion in assets and $619 billion in debt
Largest victim of the US subprime mortgage-induced financial crisis of 2008
underwrote the most mortgage-backed securities
Intensified crisis and contributed to the erosion of $10 trillion in market cap from global equity markets in October 2008 Eliminated jobs
Global stock markets fell sharply
Liquidity drain in capital markets (banks reluctant to lend to individuals)
Financial sector shrank
Depleted confidence in the government and market overall Trade Regulations in India Largest number of measures imposed (mostly trade restrictive)
Duty hikes
Import bans--introduction of licensing requirements
Anti-dumping actions
Nonrestrictive measures: removal of export duties
balanced-out tariff hikes for the most part
These measures limit trade and investments India's Duty Hikes in 2008:
General tariff hike in the wake of the crisis
WTO: General Agreement of Trade and Tariffs
Raised basic tariff rate on specific steel products from 0-5%
Raised basic tariff rate on soybean oil from 0-20% Increased tariffs on specific items

These tariff increases are not “illegal” under the WTO multilateral trading rules--as long as the tariffs are within the binding rates
Under the General Agreement on Tariffs and Trade (GATT) of the WTO, member countries set upper limits to their tariff rates
The upper-limit tariff rate, or the “bound” rate, is not always the same as the rates that WTO members actually apply
Can be a large gap between the bound tariff and the applied tariff Issues with Protectionist Trade Measures Ignore underlying local cost factors that make it difficult for industries to compete
Prevent--rather than support--vertical specialization
VS proven to be a driver of growth in east developing countries
Raising the level of trade protection will hurt both the countries that impose the measures and their trading partners
This reduces growth prospects overall at a time when the world economy needed to generate and sustain higher growth If all WTO members raised their currently applied tariffs to today’s WTO bound rates, tariffs worldwide would double
Such increases in trade barriers could cause world trade to shrink by up to 8% and reduce global welfare by up to $350 billion Increased uncertainty following fall of Lehman Brothers
Freezing of credit markets = collapse in demand for capital goods and consumer durables (goods that are not destroyed by use)
12.5% fall in global trade in 2009 Financial Crisis: Impact on Global Trade Policies and Regulations--Effects on Trade since crisis Buy American Provision States that funds originating from the stimulus package and being spent on iron, steel and manufactured goods can only go to American suppliers

Many trading partners of the U.S. have strong concerns

Direct causes can hurt U.S. marketers in export/import dependent countries due to negative effects of conflict between U.S. and its trading partners
Export companies (Cargill) and import companies (Target/Wal-mart) have encounter difficulties as their target markets are harder to reach

Decreased foreign goods due to a decline in foreign household income and trade wars between the U.S. and its trading partners

Retaliation-induced inability to import inputs for U.S. production Russia and Brazil raised tariffs on a variety of imports
"Buy Indonesian" and "Buy Victorian" In the last quarter of 2008 and the first quarter of 2009:

Annualized drop in world imports was more than 30 percent
Roughly equal declines experienced by advanced and emerging economies India's Licensing Requirements 2008:
WTO: Import Licensing Procedures
Imports of steel products and auto parts go from "free" to "restricted" category
Imports require government licenses
Mandated compliance with Bureau of Indian Standards for 11 steel products--> HIGHLY opposed by other countries and domestic business community
implementation postponed for 1 year US concerns with Indian Trade Barriers 2011: India is 14th largest trading partner of US despite difficulty to access the Indian market
Bilateral trade boom: $36.5 billion in goods in the decade to 2009/10
United States slipped from #1 to #3 in India's trading partners
Accusations of "policy-dragging" in Doha rounds
US wants India to open its markets to foreign investors to create a level playing-field Has trade recovered? Recovery in world trade began in the second half of 2009
Relatively strong recovery:
Annualized growth in world real imports in the last two quarters of 2009 and the first quarter of 2010 was over 20 percent Based on the WTO’s trade statistics report for 2011 – Trade seems to have recovered from the crisis
The global economy of 2011 was $69 trillion (measured by IMF)
$22.6 trillion in trade implies a ratio of trade to economic output of 32.5 percent
Just above the pre-crisis share of 32.4 percent
Well above the 23.5 percent of world GDP as of the millennial year 2000. Future of World Trade: Doha Round Trade negotiation round of the World Trade Organization launched in 2001 with the goal of lowering trade barriers around the world to increase global trade
2008 - talks stalled due to divide over major issues and differences between developed nations and developing counties
Still going on - accomplished very little
In July 2008 in Geneva officials came very close to concluding the Doha round but negotiations broke down over disagreements between the US and India over trade regarding agricultural goods Major Problems
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