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The report noted that the organization has warned over the past few months of the severe economic difficulties that would be caused, given the current circumstances, by any major initiative to restrict trade or distort economic measures to protect businesses, jobs and agricultural income from the effects of the global slowdown in growth. It explained that such moves would only worsen the situation and diminish prospects for an early recovery of the global economy.
Protectionism could also provoke retaliatory action by others that would further compound the damages already caused. However, the report noted that such risks exist as long as WTO members continue to enjoy the right to increase their tariff levels and raise agricultural support, ultimately harming trade, without exceeding their boundary rates or infringing other relevant WTO restrictions. In this context, it has become more urgent for the WTO to strengthen multilateral measures that discourage increased trade restrictions, in particular the reaching of an early agreement in the Doha Development Agenda (DDA) on "modalities" for agriculture and industry that will pave the way for accessions to other subjects currently under negotiation.
At a meeting held last mid-December of 2008, the G-20, APEC, China, Japan and the Republic of Korea pledged to refrain from raising new barriers to trade, export and investment, or implementing measures that are inconsistent with WTO disciplines over the next 12 months.
To date, WTO members appear to have successfully kept protectionist pressures under control. There has been only limited evidence of increases in tariffs and non-tariff barriers, or increased use of trade-remedy actions. The most significant actions taken, mainly in OECD countries, in response to the financial crises have involved financial support to banks and the automobile industry.
The impact of the financial crisis on developing economies, and the factors that led to an increase in retreat and recession
The financial crises occurred at a time when economic growth was already showing signs of slowing down, particularly in the OECD countries. Its effect was the turning of a moderate slowdown into a sharp decline in the rate of growth, by the end of the year, into recession throughout OECD countries, primarily by restricting business loans. This spread quickly to emerging market economies and other developing countries through sharp falls in export demand, foreign investment and commodity prices, as well as the shortages in trade finance.
Many factors contributed to a turnaround in the growth of merchandise trade at the second half of 2008. Firstly, dollar prices played a much larger part in the value changes than the volume changes in trade. This implies that with respect to output and employment, the changes are less dramatic than the nominal trade figures might suggest.
In the first half of 2008, trade values were boosted by the rise in commodity prices, most prominently those of oil and food. In the second half, prices of fuels and food decreased sharply. Exchange rate movements had a similar impact on dollar values. The dollar depreciated sharply in the first half of 2008 against other currencies in the second half. Currency developments thus inflated trade growth in value terms in the first half of the year and accentuated the decline in the second half.
In real terms, developments were less dramatic. Measured in real terms (i.e. adjusted for price and exchange rate changes), trade growth in the first half of 2008 was slowing and began to decline in the third quarter of the year. The WTO Secretariat estimate is 4 per cent real trade growth (somewhat lower than estimates of the World Bank and the International Monetary Fund). The World Bank marked down sharply its estimates of growth in 2009. It commented that export opportunities for developing countries in 2009 were likely to fade rapidly because of the recession in high-income countries, shortages in trade credits, and the increased cost of export insurance. Net private debt and equity flows to developing countries are projected to decline from USD 1 trillion in 2007 to about $530bn in 2009, contributing to a projected dramatic slowdown of investment growth in developing countries.
In its recent World Investment Report 2009, UNCTAD estimated a 10 per cent decline in Foreign Direct Investment flows, with developing countries the most affected. Other factors identified by the World Bank as contributing to slower growth in some developing countries are reduced remittance flows from migrant workers abroad and further falls in commodity prices. To this can be added slower growth of tourism.
The economies of all WTO Members will be affected by the economic slowdown, but the forecasts of weaker economic growth for developing countries are of particular importance because growth is so heavily trade-dependent for so many of them. This vulnerability of the global economy to financial crises illustrates clearly the perils of trade protectionism in current circumstances.
Projections for 2009 will be affected by the monetary and fiscal stimulus packages that were adopted by OECD countries. The projections would almost certainly need to be revised down further if that assumption is not met. Till now, several countries have introduced new economic stimulus packages that have cut interest rates sharply and are continuing to inject significant amounts of liquidity into financial markets. It is too early to appreciate the full implications of these packages for trade and global trading system or how they might be implemented through governments' procurement activities. One justification that countries and governments use to propose disallowing incentives for foreign companies is to protect demand for domestic products from shifting to foreign competition.
The financial crises and trade in financial services
The global financial system has been undergoing a period of unprecedented turmoil, evidenced by the collapse of financial institutions, the weakening of the financial system due to increasing losses on impaired and illiquid assets, rising uncertainty regarding the availability and cost of funding, and the further deterioration of loan portfolios.
As the financial crises has spread to all corners of the world, governments have started to launch extensive bailout programs for troubled banks and other financial institutions, along with other monetary and fiscal policy initiatives. A variety of bailout policies have been adopted by governments. Some of them put more emphasis on the asset side of banks' balance sheets, while others address liabilities and capital. The most common "asset side" policy is the purchase of troubled mortgage from banks and other lenders - basically swapping troubled assets for cash. The basic objective of this policy is to allow affected financial institutions to clean-up their balance sheets and re-start lending under more "normal" circumstances.
By contrast, measures focusing on the right-hand side of banks' balance sheets target not only the situation of the individual bank, but also the lack of liquidity in inter-bank lending markets. These measures include the following: (a) guarantees granted by Government, in exchange for a fee, for the issuance of debt instruments by financial institutions in wholesale market; (b) the provision of additional liquidity (discount window borrowing) by central banks; (c) recapitalizations; (d) the expansion of deposit protection schemes for individual depositors.
It is too early to asses the effects of these measures. Moreover, while some of the measures have targeted specific financial institutions, many others constitute in fact "rescue packages" whose effects will only be seen through time, depending on how they are implemented. When analyzing these bailout measures from the perspective of trade in financial services, it must be recognized that some of the measures at least, which in most cases constitute some form of state aid or subsidy, may eventually have negative spillover effects on other markets or introduce distortions to competition between financial institutions.
Negative spillover effects may arise if, for instance, bailout measures end up affecting banking flows between markets, thus aggravating liquidity problems or putting individual financial institutions under additional stress. The main benefits of a guarantee scheme stem from increased confidence in the financial institutions participating in the scheme, reducing the probability of a run on those institutions.
However, in a context where governments around the world are introducing or expanding these guarantees in their own markets, financial institutions not benefiting from equivalent measures may be disadvantaged in obtaining funds from overseas and/or see their deposit base eroded. Distortions to competition may also arise between different financial institutions operating in a specific market if some of them (e.g. domestic financial institutions) benefit from some of these bailout measures to the detriment of others (e.g. like foreign financial institutions). Eligibility criteria are therefore essential in order to avoid distortions to competition and trade.
Trade policy
There has been only limited evidence so far of increases in tariffs or non-tariff barriers, or increased trade remedy activities. The most significant action taken, mostly in developed countries, has been increased state aid to particular industries, notably the automobile industry, although nothing can be said for the time being about the likely trade impact of these measure, many of which are still lacking publicly-announced details.
Protectionist restrictions imposed by countries
The following information, which has been collected by the Secretariat primarily from press sources, gives an idea about trade and trade-related policy measures taken by some countries since the outbreak of the financial crises.
- ndia raised tariffs on some steel products and issued notifications restricting imports of these products in November 2008.
- Mercosur members reached an agreement in November 2008 to raise their common external tariff by 5 percentage points, on average, on a number of specific items, including wine, peaches dairy products, textiles, leather goods and wood furniture.
- On November 2008. Ecuador raised, reportedly by between 5 and 20 percentage points, its tariff on 940 products, including butter, turkey, caramels, cell phones, eyeglasses, sailboats, building materials and transport equipment. As a result, Ecuador expects to collect additional revenues of $85.5m. According to the authorities, the tariff increases aim to reduce the impact of the financial crises and they take account of Ecuador's WTO commitments.
- In Indonesia, since 15 December 2008 only five ports and certain international airports have served as entry points for certain imports, such as electronics, garments, toys, footwear, and food and beverages.
- Argentina has recently imposed non-automatic licensing requirements on products considered as sensitive, such as auto parts, textiles, TVs, shoes, and leather goods.
- In December 2008, the Republic of Korea announced that its tariffs on imports of crude oil will rise from 1 per cent to 3 per cent in March 2009.
- Ukraine's Parliament approved legislation in December 2008 to impose a temporary 13 percentage point import surcharge for balance-of-payments purposes.
- The European Commission has announced that it is re-introducing export subsidies for butter, cheese, and whole and skim milk powder from late-January 2009.
Some measures have also been taken by WTO Members to facilitate trade in this period, for example:
- China increased VAT rebates on its exports of some textiles and clothing and bamboo products, plastics and furniture on 1 November 2008, thereby partially removing implicit export taxes. It increased tax rebates on exports of about 3.770 items on December 2008. From 1 February, import tariffs and VAT on 1.730 tariff lines will be refunded if these items are bound for re-export.
- Argentina has cut its export taxes on wheat and corn to 20 per cent.
- Indonesia announced measures to facilitate trade by using a centralized electronic system for customs declarations at two key ports.
- Mexico announced that it will reduce tariffs on about 80 per cent of manufactured good imports from countries with which it has no preferential trade agreement.
- In December 2008, Russia adopted measures to support domestic car manufacturers, including state subsidies, and in January 2009, it raised import duties on cars and trucks. Meat import quotas have been reduced. The new trade-related investment measures and export subsidies have been introduced.
Official WTO data on the initiation of anti-dumping investigations during the second half of 2008 is not yet available. However, available non-WTO data suggests that there has been no dramatic increase in the number of anti-dumping investigations initiated in the second half of 2008, compared with the first half of the same year. The number of anti-dumping investigations is expected to increase in 2009.
The auto industry has been hit particularly hard by the slowdown, and government support packages have been provided or are under consideration in a number of countries. For example, media reports indicate that the US has approved federal loans of $17.4bn for General Motors and Chrysler; Canada has similarly announced a CAD 4bn aid package of short term loans. Sweden will offer Saab and Volvo SEK 25bn in loans and loans guarantees and SEK 3bn for research into cleaner technologies; Germany has announced EUR1.5bn in incentives for car buyers and EUR 500m towards innovation; France has announced a EUR300m restructuring fund for the car industry and a EUR1bn loan facility to support Renault and Peugot; Australia will set up a Dhs2bn fund as a financing trust to provide liquidity to car dealer financiers. Also, Argentina, Korea and China have taken a variety of measures to support their respective automotive sectors.
Trade finance
The effects of the current banking and financial crisis on international trade have been felt directly through the tightening of liquidity, which affects the supply of trade credit by the main international banks. With their credit departments competing for a reduced amount of liquidity, international banks are not able to supply as much credit as demanded by traders at affordable rates. Moreover, the sharp deterioration of global economic prospects is triggering a general re-assessment of credit risk, entailing a sharp increase in the cost of credit, insurance and guarantees for trade.
At a WTO conference in Geneva before the G-20 meeting, the WTO assembled private banks, international financial institutions and regional development banks to assess the problem and look for solutions.
The message that came from the WTO Conference and the G-20 on trade finance has considerably boosted the mobilization of export credit agencies and regional development banks. The WTO will continue to do its utmost to mobilize all actors to avoid a drying up of trade finance, which, if it happened, could accelerate the contraction of trade and output in the only part of the world (developing countries) that is expected to sustain positive growth in 2009.
Posted by Rima Ali Al Mashni
