The collapse of global trade, murky protectionism, and the crisis:

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VOX Research-based policy analysis and commentary from leading economists President Zedillo writes: What we do know with certainty is that protectionism could derail all those efforts applied on the fiscal and monetary fronts. Despite the multitude of statements against protectionism made by leaders and their finance and trade ministers in recent months, it would be irresponsible not to recognise that the mercantilist spectre is knocking at everybody's door. … Unfortunately, as the recession gets worse, protectionist forces will become even stronger. A perverse cycle of feedback between recession and protectionism is no longer an historical reminiscence of the 1930s but a possible scenario now – hopefully still with a low probability – in the months and years to come. Minister Crean writes: We must re-commit ourselves to renouncing protectionism, be it trade or financial. To ensure we get the biggest bang for our buck, we need to ensure the benefits of our stimulus and rescue packages can flow across borders, so that all can benefit from the actions we take individually. G20 leadership by example is essential to create a virtuous cycle in which countries lift each other up rather than pull each other down through protectionism. From 'beggar-thy-neighbour' to 'nurture-thyneighbour'. It is critical that G20 leaders get ahead of the crisis and take steps that prevent murky protectionism from threatening the global recovery. Having invested hundreds of billions in bailouts and stimulus packages to counter falling domestic demand, it is foolish to risk triggering further falls in another major source of demand, namely exports. This ebook presents several concrete proposals that G20 leaders could adopt to reduce the chances that a protection-recession spiral derails macroeconomic efforts to stimulate the global economy. Why is trade collapsing? We do not yet have all the facts, but the two leading explanations of the sharp contraction in trade are the widespread use of international supply chains, and the drying up of short-term trade credit. International supply chains As Kei-Mu Yi argues in Chapter 9, there are strong hints that the massive reorientation of trade flows towards multiple-step supply chains has played a large role. Manufactured exports are no longer made in one nation and sold in another. Today, goods are made via complex, international networks; effectively, nations are nodes in international supply chains. (Figure 2 shows an example – the supply chain for harddisk drives assembled in Thailand.) A fall in US spending on laptops assembled in China lowers Chinese exports directly, but much more as well. The laptop's parts and components come from all over the world; exports across the entire supply chain fall. Even US exports fall, as fewer imported laptops lowers demand for US-produced laptop parts. The decline in trade is a multiple of the recession-linked decline in US final-good import demand. The point is that trade is measured in gross value terms, and the same value-added often crosses borders many times as parts become components, components become intermediate goods, and intermediate goods become final goods. This is how international supply chains amplify the trade effects of national downturns in demand. The unusually sudden and synchronised nature of the trade collapse is also most 2
The collapse of global trade, murky protectionism, and the crisis Figure 2 A supply chain example. (This shows the nations where parts are sourced for a harddisk drive assembled in Thailand.) USA Disk, Head, Suspension Mexic o Head Thailand Spindle Motor, Base, Carriage, Flex Cable, Pivot, Seal, VCM, Top Cover, PCBA, HGA, HAS Malaysia Base, Pivot, Spacer, VCM, Base Card, Top Clamp, Disk China PCBA, Carriage HGA, Base, Head Suspension Hong Kong Filter Cap Taiwan Top Clamp Philippines Damping Plate, Coil Support, PCBA Japan Cover, Disk, Screw, Seal, Ramp, Top Clamp, Latch, Plate Case, Label, Filter PCBA, Suspension Singapore Cover, Screw, Pivot, PC ADP, disc Indonesia Suspension, VCM, PCBA Source: Baldwin (2008) based on data adapted from Hiratsuka (2005). likely connected to supply chains. The supply-chain nodes are in continuous communication to ensure the flow of parts and components just matches the demand for final goods. When the message comes that one less laptop needs to be assembled in China, the entire supply chain scales back immediately. This is surely one part of the remarkable synchronicity of the global trade collapse. Finally, supply chains may also account for the nature of the protectionist reaction. In the modern world of manufactures trade, the competitiveness of a nation's exports is directly connected to the cost of imported parts and components. This is why there is little fear that emerging nations will raise the tariffs that they cut unilaterally over the past decades. This liberalisation focused on imported parts and components because cutting these tariffs improved their manufacturers' competitiveness. Raising tariffs on manufactured imports – the vast major of which comprises parts and components – does not protect domestic manufacturing jobs, it destroys them. Trade finance has dried up Lack of trade credit is also part of the problem, although as Marc Auboin notes in Chapter 15, data on trade credit financing is so poor that we cannot quantify the impact. Still, experts reckon they understand the harmful dynamics currently at 3
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