Marco Fugazza Division on International Trade UNCTAD

1. Marco Fugazza Division on International Trade UNCTAD

2. How does UNCTAD help developing countries? • Research and analysis • Forum for consensus building • Technical cooperation • Extrabudgetary funding • 17 clusters (more 300 projects) • Prerequisite: Government request

3. Main activities • International trade and commodities • Money and finance • Investment and enterprise development • Transport, trade facilitation and technology • Africa and least developed countries

4. Trade • Problems faced: • Non Tariff barriers • Declining terms of trade • Lack of supply capacity • Tariffs on products of interest • Tariff escalation • Subsidies • No Competition/consumer Policy • Global warming

5. Trade UNCTAD activities (non-exhaustive list): Research and Analysis • Policy Analysis on regional trade negotiations • Analytical work on trade related issues: e.g. Dynamic sectors, adjustment to trade liberalization, bio fuels, the crisis • Data collection on tariffs and Non-tariff measures (TRAINS) Technical Assistance => Training/Capacity Building on: • WTO accession & WTO rules • Competition policies • Tools for Trade analysis • Trade related Data (WITS) • Implementation of environmental standards Consensus Building • Providing a neutral forum in support of WTO negotiations

6. Commodities • Measures taken by UNCTAD: • Commodity Agreements/Common Fund • Risk Management methods • Technical cooperation: • Market Studies (Infocomm) • Training in modern financial risk-management • Diversification of Industries

7. Trade, Trade Policy and the Global Crisis

8. Declines in Trade flows • Decline in demand in importing markets • Lower demand trickles down to all goods imported • Increase in protectionist measures in importing markets • Obstacles to imports • Subsidies to domestic firms

9. Trade as a vehicle for contagion Dev. Countries are not “decoupled”. Crisis spreads to developing countries thru: • Reduction in TRADE • Lack of demand for exported product • Lack of trade financing, no guarantees = no trade • Reduction in other flows: • Investments, financial aids, remittances, migration

10. Decline in GDP and its effect on Trade flows • Collapse in trade flows is a multiple of reduction in GDP • Estimates on the elasticity of world trade to world income increased from around 2 in the 1960s and 1970s to 3.4 in the 1990s (Irwin, 2002), now it is probably >4. • This would imply that trade should decline more than three times as much as GDP, assuming crises are not special • The increase in the elasticity helps explain why trade has fallen so hard in the current global slump

11. Trade and the Crisis • The historical increase in the elasticity of trade to GDP is due to: • Increase in the links bewteen economies • Lower trade costs, RTA, FTA, WTO. • Rise of Global Production Chains • Because many new goods use small inputs that are nearly costless to trade (e.g. mobile phones and digital cameras), the production process of these goods has become fragmented across countries • Many more traditional goods, such as shoes and cars, are also increasingly incorporating imported inputs • The greatest responsiveness of regional exports to global income is found in East Asia (Global Factory) – where a 1% increase in world real GDP leads to 4.5% increase in real exports since 1995

12. Trade=4*GDP in general… But it can be worse… Trade can respond more sharply in economic crisis than in growth periods Two main reasons: • Firms may draw down accumulated inventories sharply when the forecast worsens in an unexpected and dramatic way • When global GDP drops sharply, protectionist policies kick in, which exacerbate the decline in trade

13. and even worse… Trade will fall even more when… Production outsourced at the margin: • A large decline in trade could reflect a much smaller decline in the value added if production is done across countries at the margin, and as demand falls international production chains break down (For example, Porsche recently announced that it is reducing outsourcing to Finland during the crisis, while maintaining German production • Support the local economy and jobs • Nationalistic interests • Buy local provisions • Political economy issues, government subsidies for keeping production domestic • Cost of trading increases, lack of international financing • Trade financing becomes scarce or expensive

14. Some data on Trade Flows • In the first quarter of 2009, global trade in US$ terms fell by 30% on average relative to the same period last year… but prices have fallen as well… • So the world trade volumes is estimated to have fallen less… by over 15% during this period • Everyone is affected. The declines have been widespread across countries and products, largely reflecting the sharp drop in global demand

15. Initial Effects on Trade. (Distribution of 41 countries by rate of decline in exports on a year by year basis)

16. Drop in US Imports (Agriculture and Manufacturing) • US imports have been declined regardless of origin • Manufacturing imports have been declining substantially • more than agriculture

17. US Imports from developing regions • US imports have been declined from all developing countries • but proportionally less so from East Asia and Latin America

18. US Importsfrom East Asia • Indonesia doing better than MYS THA PHL, worse than VNM CHN • Year to Year decline in export to US in 2009 has been about • 10 percent in Agriculture • 25 percent in Manufacturing

19. Some Forecasts • Using an elasticity of trade to income during the downturn of between 3.5 and 5, and a deceleration in real world income growth of 4.7 percentage points (the current World Bank estimate > UNCTAD & WTO figure), the deceleration in real trade growth would be between 16-24 percentage points in 2009 • World real trade growth in 2008 was about 4%, yielding a contraction in real trade of 12-20%

20. TRADE POLICY How countries react to crisis

21. Looking at the past: Previous Crisis (1933) • During the great depression protectionism spread rapidly • The protectionist response started in the United States with the Smoot-Hawley Tariff Act passed in June 1930, which raised tariffs by 23 percent • Many countries retaliated, the contribution of protectionist forces somewhere between 25 to 50 percent of the total decline in world trade • By 1933 world trade was only a third of what it was in 1929 But back then protectionist was the only policy response, the gold standard limited the possibility of monetary and fiscal stimulus.

22. Looking at the recent past: More recent crisis (1990-2006) • Most countries did not increase tariffs when GDP fell • Rely more on financial measures - international aids (IMF), and trade partnership. • International trade is much more regulated than it was in the past… meaning countries need to obey to agreements and thus have less policy space • Still…. these were regional crisis • Now countries cannot rely on external demand (exports) to prop-up their economies.

23. Trade is governed by rules. …what is the “legal” Policy Space • Great disincentives to break rules. • Trade measures that countries can use to cope with the economic crisis (reduce imports, increase exports). • Tariff measures: MFN, Preferential, Ad Valorem, Tariff rate quotas • Non Tariff Measures: subsidies • WTO “safety valves”: Anti dumping and Countervailing Duties & Safeguard measures • Other Measures affecting trade: competitive devaluation All these measures have benefits, costs and risks

24. Tariff Measures PTA Preference BOUND Legal Commitment WTO MFN Unilateral Liberalization Countries Policy space is now much more limited than it was 80 years ago. Still there is a lot of policy space for developed countries that want to raise tariffs.

25. Traditional Trade policies Although countries have large policy space the increase in tariff has been very limited so far. Why? • Counterproductive? Increase in tariff hurts exporters. • Tariffs are too visible? Beggar-thy-neighbor, easy to single out countries, retaliation. • Use of other alternative forms? Murky protectionism. • Not yet time? Employment is still fine. Trade policy is dictated by employment at home.

26. Murkier form of protection Most NTM are now in the form of SPS and TBT. These can be a problem for exporters, especially for these from LDC. Needs for more monitoring of NTM. At the moment we can say very little if NTM are being used with protectionist purposes.

27. Antidumping Pre-Crisis Prediction Actual numbers for 2008 Antidumping cases were down up to August 2008 But jumped dramatically in the latest months of 2008

28. Other measures affecting tradecompetitive devaluation

29. World Bank InventoryTypes of measures imposed by developed and developing countries

30. Responses so far… • Limited responses in the form of trade policies • Very little tariff increases • Some use of NTM, but not sure if for protectionist purposes. • Antidumping increases • Much larger responses in term of stimulus for domestic demand • Public procurement • Implication for trade as they have buy local provisions • Still it is not over, and there is ample legal policy space for protection incentives to increase import restrictions if: • Employment increases • Recovery is not widespread

31. Factors explaining the limited use of trade policy to date • Countries now tend to rely on other form of intervention (Monetary and fiscal), and possibly more hidden form of protection • Globalization of production has changed the incentives of seeking protectionist policies • WTO, RTA, FTA are all international binding disciplines that limit the trade policy space • Increase awareness of the negative effects • Employment effect not felt yet, and thus political pressure not strong enough

32. Some stylized facts on policy intervention • Where multilateral discipline exists, recourse to protectionism has been more limited • Limited increase in tariffs • Antidumping, but that is a safety valve • Where multilateral discipline is weak or not-existent, countries have been less able to resist protectionism. • Export subsidies (US EU dairy) • Public procurement and buy national provisions • Countries less bind by international agreement have recurred more to protectionist measures • Algeria, Argentina, Ecuador, Russia

33. International agreements help… • As international agreement helps in resisting protectionist pressure they need to be pursued and expanded. • Priority for governments to re-engage in negotiation (DOHA) to establish disciplines in trade policy areas that are weakly covered. Think Doha in terms of what could avoid, not of what would do to liberalization.

34. What are the Good, the Bad and the Ugly trade policies? • Trade policy are redistributive. Depend who you ask to… • And depends also on the effect of your policy on other countries… • But some are likely bad in times of crisis: • Restrict exports • Reduce internal demand (increase prices of domestic products) • And some are likely good • Facilitate exports (Export subsidies) • Increase internal demand (Public Procurement) • And some are ugly to your trading partner • Increase tariffs on their product

35. Developing countries and the crisis Developing countries are heterogeneous, thus policy response to the crisis is not similar Different Trade and productive capacity • Tied to global production chains (middle income) • Tied to price of commodities (LDC) • Tied to price of food crops (Latin America, some low income) Availability monetary reserves • Countries with large reserves can stimulate their own economy. • Countries with limited reserves cannot. International help needed.

36. What developing countries can do? • Refocus economy from exports to domestic (stimulus packages). Industrial and expand into new or import competing sectors domestic sectors: (Domestic stimulus packages) • Limited to middle and upper middle income countries • Requires some form of protectionism • Unfeasible for little countries, most low and LDC • Keep export flowing • Increase export competitiveness • Increase South-South Trade • Vigilance on potential protectionist measures in export markets

37. Refocus Economy to domestic • Stimulate domestic demand as to absorb excess supply capacity • Protect domestic industries? • Past experience of S. Korea and Taiwan… When the world economy was booming, they went all out for exports; when global markets slowed, they turned inwards: industrial upgrading that involved state-directed credit and other support, but also involved protecting themselves from imports of the more advanced sectors (iron and steel, chemicals etc) that they were trying to move into. i.e. protectionism. But many bad cases in other parts of the world. • But that was the past… less globalization, less export lobbying, less regulatory framework, and downturns were not global.

38. Limit Imports? • Generally not a good idea… but • Within WTO framework “safety valves” • High risk of retaliation • When unavoidable, make sure that trade restrictive policies are temporary… because trade policies are difficult to remove once have been put in place. • Resist protectionism measures, detrimental to exporters.

39. Keep export flowing… • Export competitiveness • Improve trade efficiency, reduce domestic trade costs • Better fit firm/countries will survive and benefit most once the crisis is finished. • Keep pressing donors. International Aid for Trade, especially important for LDC. • Increase S-S trade • Liberalize it • Facilitate FDI from developing to developing countries • Facilitate trade payments without need for hard currencies. • Diversification … products and markets

40. Keep export flowing… • International vigilance on trade policies. • Monitor what trading partners are doing: Crisis has put pressure on government to assist domestic industries and protect employment • Stimulus packages should leak to other countries • Push for the inclusion in the multilateral round (Doha) of regulation on trade policies instruments that are poorly regulated and can be used as trade distorting measures (subsidies, NTM, etc) • G20 commitments are fine but need to follow: fact/disbursement To do so…. • Many developing countries need investment in economic and legal capacity to better understand the implications of trade policies imposed on their exports and to better defend themselves within WTO legal framework. • More interaction with the private sector so to quickly be informed on trade measures that are restrictive of exports

41. Concluding Remarks • Protectionism is dangerous and it is not the answer to the global crisis. • Further trade agreements within the MTS (Doha) will help freezing protectionist impulses (insurance vs protectionism). • Improve trade competitiveness is essential in times of crisis • Vigilance and monitoring of ALL trade policy instruments is essential to avoid protectionist behaviors. • A Prolonged crisis could change the rules of the game. From a period of liberalization to a period of more restrictive trade

42. References • The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20, edited by Richard Baldwin and Simon Evenett, VoxEU e-book • The fateful allure of protectionism: Taking stock for the G8 , Edited by Simon J. Evenett, Bernard M. Hoekman and Olivier Cattaneo, VoxEU e-book • www.voxeu.org • http://www.globaltradealert.org/ • www.unctad.org