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The Global Financial Crisis and Trade Protectionism

The Global Financial Crisis and Trade Protectionism. International Trade Relations George Mason University Fall 2009 Presenters: Justin Badlam Brian D. Behringer Kojo Boateng. Introduction. Topics Covered Contraction of Trade Finance Approaches to boost availability

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The Global Financial Crisis and Trade Protectionism

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  1. The Global Financial Crisis and Trade Protectionism International Trade Relations George Mason University Fall 2009 Presenters: Justin Badlam Brian D. Behringer Kojo Boateng

  2. Introduction • Topics Covered • Contraction of Trade Finance • Approaches to boost availability • Trade Protectionism • History of trade protectionism • U.S. protectionist policy and schemes • Recent cases • Trade Prospects

  3. What is Trade Finance? • Working capital that supports trading activities between two parties • Actors and Entities in Trade Finance • Private Banks • Government Entities (OPIC, Ex-Im Bank)

  4. Aspects of Trade Finance • Pre-Shipping Finance • Capital utilized for the manufacturing of goods (i.e. typically exporters) • Importers need a line of credit to purchase goods before selling them • Payment of Goods • Banks act as facilitators for payment between exporter and importer through several methods (documentary collection, letter of credit, etc.); mitigates risk of non-payment • Export Credit Insurance

  5. Mechanics of Trade Finance • Method of Payment • Cash-in-Advance • Letters of Credit • Documentary Collection • Open Account • Insurance • Political Risk • Currency Transaction Risk • Transportation and Compliance Risk

  6. Relevant Legislation • Anti-Boycott Provisions of the Export Administration Act of 1979 • Export Trading Company Act of 1982 • Other Legal Issues • Standby letters of credit and guarantees, which are defined as contractual commitments to advance funds, are subject to the limits of 12 U.S.C. 84 and must be combined with any other non-accepted loans to the account party by the issuing bank (12 CFR 32.2 [f] [j]).

  7. Consequences of the Global Financial Crisis • Disturbances • Contraction of liquidity caused sharp increases in premiums • Banks experienced tighter internal credit and risk limits • Some commercial banks stopped lending because of deteriorated balance-sheets and/or fear of payment defaults from trade operations • Decrease in open account transactions • Other Undesirable Outcomes • Decline of International Trade • Fall in international demand for goods

  8. Statistical Snapshot • Reliance • Approximately 85-90% of trade relies on some form of trade finance • As of 2008, in dollar terms, the trade finance amounted to $11 trillion • Onset of the Global Financial Crisis • World trade volume contracted by nearly 10% • Approximately 20% of the fall in trade volume is because of the lack of supply of trade finance

  9. Current Operating Policies • Injection of Liquidity • WTO infused $250 billion to support trade finance • Export-Import Bank assisting with short-term lending programs • Currency Transactions • Central banks have assisted is supplying foreign currency to local banks and importers • Securing Supply Chains • U.S. has granted large credit lines to secure supplies from large trading partners (i.e. China and South Korea)

  10. Trade Protectionism • International Context • WTO • Principles & Rules • National Treatment & Most Favored Nation • On-Going Rounds of Negotiations • Dispute Settlement Body • Accession Process

  11. Trade Protectionism • History – U.S. Context • Regional & Political Issue • Northeast Industry vs. Southern Economy • Common & Constituent Interests • Congressional Attitudes • U.S. Competitiveness • Legislation • The Tariff Act of 1789 • The Underwood Tariff of 1913 • The Smoot–Hawley Tariff Act of 1930 • GATT – WTO

  12. Post Financial Crisis Protectionism • Financial Protectionism • Decreased Lending Across Borders • 82% Lower in 2008 than 2007 • Revised IMF? • Trade Protectionism • Global Trade Alert Report – Sept. 2009 • “Obama Protectionism” • American Recovery and Reinvestment Act of 2009 • “Buy American” • EU – “U.S. Protectionism on the Rise”

  13. Opposition to U.S. Protectionism • Trading Partners • Multilateral Institutions - WTO • Industry Groups • Economists & Economic Theory • Milton Friedman  Paul Krugman • Universal Consensus Among Free Market Economists for Free Trade

  14. Trading Partners & Protectionism Abroad • Import Surge Protections • Currency Manipulation & Artificial Currency Float • China’s Select Open Sectors for Imports • Japan & Korea’s Food Import Restrictions • Immigration Restrictions • Increased Export Subsidies

  15. Protectionist Measures: Goods & Countries

  16. Future Prospects & Obstacles • Trade & Policy Outlook -- Global Financial Crisis • U.S. Trade Policy • Multilateral approach • U.S. Dollar & Global Fiscal Policy • Reviving the Doha Round • Impact on Developing & Least Developed Countries

  17. U.S. Trade Policy – Post Financial Crisis • Export Oriented Growth Over Consumption • U.S. Encouraging of Domestic Growth Rather Than Export • “Consumer of Last Resort” •  Avoiding Trade Barriers and Trade Distorting Policies • Multilateral Outreach & Policies

  18. International Context – Post Financial Crisis • Pessimistic Outlook: Massive Fiscal and Monetary Overhauls • Export Led Growth • Avoid New Trade Protectionism Schemes • Emergence of BRIC Countries In the Crisis • Countries Ought to Operate in WTO Framework

  19. Problems of Developing Countries • Rapidly Shrinking Export Markets and Capital Inflows • Lack of Fiscal Reserves • IMF & Role in Post-Financial Crisis • Liquidity Issues • Global Fund of Emergency Reserve Available - Special Drawing Rights

  20. Policy Proposals and Recommendations • Continuing to ensure short-term trade finance • Co-sharing of risk • Public and private entities working together to burden risk • Further injection of liquidity to entities involved with trade finance • Continuation of trade finance behavior over the coming year

  21. Policy Proposals and Recommendations • Eliminate Protectionist Measures • Operate Under WTO Framework • Increase Exports • Work with Foreign Governments to Open Markets & Build Fiscal Reserves • Address Global Fund & Liquidity Issues

  22. Sources • Auboin, Marc, and Moritz Meier-Ewert.Improving the Availability of Trade Finance during Financial Crises. Rep. World Trade Organization, 2003. Print. • Auboin, Marco. "Boosting the availability of trade finance in the current crisis: Background and analysis for a substantial G20 package." Policy Insight. Centere for Economic Policy Research, June 2009. Web. Nov. & dec. 2009. • BBC NEWS. " China and US 'to work together'." BBC NEWS, N.p., n.d. Web. 2 Dec. 2009. <http://news.bbc.co.uk/2/hi/8363643.stm>. • Bergsten, C. Fred, Peterson Institute for International Economics, The Dollar and the Deficits: How Washington Can Prevent the Next Crisis, Foreign Affairs, Volume 88 No. 6, November/December 2009 <http://www.iie.com/publications/papers/paper.cfm?ResearchID=1312>. • DAVIS, BOB. "Financial Protectionism Is Latest Threat to Global Recovery - WSJ.com." The Wall Street Journal - WSJ.com. N.p., n.d. Web. 2 Dec. 2009. <http://online.wsj.com/article/SB123351377581636947.html>. • "EU sees trade protectionism on rise in U.S." Reuters.com. N.p., n.d. Web. 2 Dec. 2009. <http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSL116415920080611>. • Johnson, Simon, Peterson Institute for International Economics, Testimony: US Foreign Economic Policy in the Global Crisis Testimony before the Subcommittee on Terrorism, Nonproliferation and Trade, Committee on Foreign Affairs, US House of Representatives, March 12, 2009 .

  23. Sources • Marchi , Sergio . "Building Support for U.S. Trade - Carnegie Endowment for International Peace." Carnegie Endowment for International Peace. N.p., n.d. Web. 2 Dec. 2009. <http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=24188>. • Miller, John . "Protectionist Measures Expected to Rise, Report Warns ." Wall Street Journal - Asia. N.p., 16 Sept. 2009. Web. 1 Dec. 2009. <online.wsj.com/article/SB125295068841109309.html?mod=rss_Politics_And_Policy#printMode>. • Smith, Joseph. "American Thinker: Obama's new protectionism." American Thinker. N.p., 19 Sept. 2009. Web. 2 Dec. 2009. <http://www.americanthinker.com/2009/09/obamas_new_protectionism.html>. • Thomas, Richard, and Alan Beard. Trade Finance Handbook. South-Western Educational Pub, 2005. Print. • United States of America. Department of Commerce. International Trade Commision. Trade Finance Guide: A Quick Reference for U.S. Exporters. Washington, D.C.: U.S. Government, 2007. Print. • United States. Cong. Congressional Research Service. The Global Financial Crisis: Foreign and Trade Policy Effects. By Dick Nanto. 111 Cong., 1 sess. Cong. Rept. Washington, D.C., 2009. Print. • Voice of America News, "OECD Warns Protectionism Will Worsen Financial Crisis" Voice of America News. Web. 2 Dec. 2009. <http://www1.voanews.com/english/news/a-13-2009-03-19-voa38-68824422.html>

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