Transcript Global Financial Crisis: Implications for Global Trade

Global Financial Crisis: Implications
for Global Trade
Lowy Institute June 10
Robert Z Lawrence
Harvard Kennedy School &
Peterson Institute for
International Economics
The Challenge
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Financial Crisis
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Weaknesses of Capitalism?
Free Trade?
Or Financial System Laissez Faire?
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Prior to Crisis
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2000 View: Trading system of for Industrial
countries but inadequate for development,
(besides China and India).
Response: Doha Development Agenda:
Growth through higher farm prices.
Developing Countries: Widespread
Growth
De v e l opi ng Count r y Gr owt h
12.0
10.0
8.0
1997-2001
6.0
2001-2007
2008-2009
4.0
2.0
0.0
Af r i ca
M i ddl e East
Sub-Sahar an
Lati n Amer i ca
Chi na
Indi a
Asean
NIEs
Global Growth Since 2000: The Great
Divergence.
GDP Growth 1980-2013
9
8
7
6
5
Advanced economies
Emerging and developing economies
4
3
2
1
12
20
10
20
08
20
06
20
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
19
80
0
IMF: WEO Oct
2008
Great Irony
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Eight years of trade-led widespread prosperity in developing
countries.
(booming commodity prices, exports, foreign investment)
Developing countries running trade surpluses, accumulating
foreign exchange reserves.
Disappointing performance in developed countries especially
the US (dot.com burst, weak wage growth etc).
No surprise that attitudes shifted in Developed Countries.
The Only Problem: Global Imbalances
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Big Questions:
Were borrowers solvent?
Was US spending beyond its means?
Could lenders accumulate?
Could the world add $ claims on US?
Missed totally: the weak link the
intermediation process.
How Could it Happen?
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Intellectual Reasons.
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Political Reasons.
Response to Shock
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Capital flows dry up.
Commodity prices plunge.
Trade Flows falling faster than great
depression.
Almost no country is spared;
Interdependence proven!
Will Mistakes of 30s be repeated?
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Fiscal Policy.
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Monetary Policy and Financial System
Rescues.
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International Cooperation.
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Smoot-Hawley.
Trading System: Good and Bad News
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Good News:
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WTO and System based on Rules.
Intellectual Understanding of Dangers of Protectionism.
G20 Commitments and cooperation
Bad News:
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Loopholes in Rules.
Political demands for protection.
Increased government involvement provides
opportunities for supply
Spillover into trade and project finance.
Wither World Trade?
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Short Run—a V an L?
My view: Reverse Check Mark
Good news: Many countries were in
reasonable shape. Low inflation, strong fiscal
positions, high foreign exchange reserves
We are now seeing the end of the begining
But Major Challenges for Trade

US
–
short run, impressive fiscal expansion, and federal reserve
responses. The central weakness requires US action.
– The real conflict for US is between the short and medium
term.
– Short term politics are easy but longer term how to tighten
belts, remove liquidity without inflation. EU:
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EU
–
Can the Euro survive?
– Deficit and Surplus Countries.
– How to restore growth
Challenges
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China:
Towards an internally driven economy?
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Implications for other countries.
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Decoupling 2.0?
Domestic drivers in Developing Countries.
Opportunities for Commodity Producers like Australia
Financial globalization particularly via private capital markets is going to be
constrained.
Export-led growth, via supply-chains that end up in the US and the EU are
going to be more limited.
The competition will be for markets dominated by the emerging middle classes
in developing countries.
Global Trading System
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Doha: Can it be done?
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Some good signs.
India,
US,
A more valuable agreement.
Longer Term.
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Challenge of a multi-polar common system based on self
interest
WTO: Variable geometry and broader agenda?
Regional Agreements: Specialized Roles?
Dangers of self-fulfilling internally driven system