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

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VOX Research-based policy analysis and commentary from leading economists References IMF (2003), "Trade Finance in periods of crisis: Assessment of Key Issues", available on www.imf.org/external. WTO (2003), The Trade, Debt and Finance Nexus: At the Cross-Roads of Micro- and Macroeconomics, WTO Discussion Paper 6, Geneva. About the author Marc Auboin is a Counsellor in the Economic Research and Statistics Division of the WTO, and a member of the WTO Task Force on the Finance Crisis and Trade. Previously he held several positions at the International Monetary Fund (IMF), was Deputy-Secretary General of the Monetary Committee of the European Union, and worked for the French Treasury. He also lectures at the World Trade Institute in Switzerland and at CERDI in France. 80
16. Bailouts: how to discourage a subsidies war Simon J. Evenett and Frédéric Jenny University of St Gallen and CEPR; ESSEC and Cour de Cassation During the current global economic crisis many governments in industrialised countries have shied away from blatant protectionist measures, such as raising tariffs and imposing quotas, and have instead offered "bailout" packages involving considerable sums of state funds and guarantees to the banking, insurance, and automobile sectors, to name a few. In part, this reflects the drying up of credit offered by traditional financial intermediaries to each other and to the rest of the private sector. As the crisis has deepened, however, the rationale for these bailouts has shifted from the preservation of the payments system (an economy-wide matter) to sectoral initiatives targeting jobs loss and the viability of selected firms. Doubt is cast here on the wisdom of this shift, especially as the discriminatory impact (if not intent) of these bailouts could trigger a wasteful subsidies war between governments. The systemic purpose of the initial bailouts In the past 12 months bailouts have implemented for two reasons. First, the sheer magnitude of the total losses from holding mortgage-backed assets (estimated to be of the order of five trillion dollars) and other financial instruments has created concerns about counter-party repayment risk and bank insolvency. So as to prevent runs by bank depositors, that could ultimately jeopardise the viability of the national payment systems upon which monetary economies survive, a compelling case was made for offering financial support to banks. Second, the destruction of wealth in the financial sector has also hurt the real economy. The decrease in stock values and falling house prices have reduced expenditures by investors and retirees who live off their stock and bond portfolios. Banks with weak balance sheets and financial institutions have less working capital to lend. This further affected the real economy by reducing consumer purchases of goods and services, and investments by firms that use credit to finance their expansions. Furthermore, increased uncertainty about the future (in particular concerning the prospect of being unemployed) generated a fall in spending for risk-averse consumers and investors. Taken together these effects have systemic implications. Many firms have found themselves facing a double squeeze; on their sales and on sources of working capital. Consequently, pressures to lay-off employees and cut investment levels have intensified. In these circumstances governments cannot be realistically expected to confine bailouts to the banks when other large firms face bankruptcy and unemployment queues lengthen. So it came to pass that governments, through separate interventions and in stimulus packages, have offered subsidies to banks and commercial firms. These subsidies have taken many forms. For example, some have consisted of direct payments to 81
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