The G20?s Pittsburgh Summit should be doing its best to honour the six pledges made by the constituent economies during last April?s London Summit. The promises were to restore confidence, growth and jobs. There were assurances, too, of a restoration of lending; that is to be done through a clean-up of financial systems, stronger financial regulations, and funding (plus reform) of the major international lending institutions. A parallel track of reforms includes the promotion of free trade & investment and rejection of protectionism. Finally, there is emphasis on environmental sustainability and inclusiveness.
None of the above is a surprise. But, what could astonish is how trade access has muscled its way into the G20?s discourse. The new mantra of the grouping?s emerging economies is improved commercial access to developed markets. That is easily explained: after being brought up on a 35-year diet of ?export-led? growth, market access is something on which most emerging economies depend. During recessions market access becomes the focal point and the bone of contention between developed and developing economies. Exports can hardly be the locomotive while the global economy continues to contract by 2.9%.
So the forecast for world trade is dismal, and the WTO?s latest is that merchandise trade will contract by 10% in volume terms in 2009. Meanwhile, the focus on trade should please the G20?s developed economies. That is because it is far simpler to agree on how to phase out protection and award better market access to emerging economies than to hammer out common rules relating to banking-sector regulation and bonuses. The EU has been sounding out other developed economies on financial-sector bonuses and regulations.
There is an additional feature of the emerging economy demand for trade access. Access of just that sort had been the leitmotif of the London Summit?s G20 communiqu? last April. And, even on September 14, the heads of OECD, WTO and UNCTAD were seen to be exhorting member-economies to maintain liberal trade regimes. The occasion for their so doing had been, of course, the release of Report on G20 Trade and Investment Measures.
The positive thing of the report is that it dispels all misgivings that the current recession might promote trade protection of the nature that had been witnessed during 1930?s Great Depression. The report says: ?In addition to active monetary and fiscal policies, international rules for trade & investment agreements have supported growth and restrained resort to beggar-thy-neighbour trade & investment policies.? But the report rues the lapses into selective protectionism that certain countries have been lapsing into following the advent of the global crisis.
About the G20 in particular, it says that many members have hiked tariffs towards their officially bound rates; they have also started to implement new non-tariff measures. Thus, all have persisted with trade defence mechanisms, or even started agricultural export subsidies. No wonder that the report wants governments to desist from such acts. It also wants to see an end to financial packages that thwart imports but provide export subsidies. Governments are even asked to ?start planning a coordinated exit strategy that will eliminate these elements as soon as possible.?
That also explains why the Pittsburg Summit will see the G20 operating with restricted policy choices. They will be forced to wean themselves away from subsidies, and also steer a careful path away from inward-looking activities. Otherwise, many from within the G20 would fall afoul of domestic markets that have become shallow and bereft of effective demand.
Clearly, the summit will be held not just against of the background not just of national, or regional, trade erosion; gloom suffuses even the global scenario for trade & investment. WTO and OECD rules have acted as a safety harness preventing the adoption of wide-scale protectionist policies. Despite that, the Gurria-Lamy-Panitchpakdi Report extrapolates a fall in the volume of world merchandise trade in 2009.
The report is just as downbeat about global FDI flows, saying that such flows will decline by 30-40% in 2009. So there is no doubting that the world-wide economic contraction that began in 2008 and gathered pace in the first quarter of 2009, has greatly set back international trade and investment. The curious thing about the fall in trade volume over the three closing months of 2008 and the first three of 2009 is that it was bigger than any previous slowdown.
One reason that has been given for that is that this is a global slowdown; accordingly, there are no pockets of demand when all other regions have failed. A second reason has to do with the extent of declines; that the magnitude of their decline is much larger than in earlier times has to do with the increasing presence of global supply chains in world trade. Fluctuations in trade are occasioned by differences between locations of production, multiple crossings of customs outposts. The third element that can contract trade is shortage of trade finance, while the fourth is greater protectionism.
The author is a fellow at the Maulana Abul Kalam Azad Institute of Asian Studies, Kolkata