WTO Warns Of 9% Global Trade Decline

by Mike Godfrey, for LawAndTax-News.com, Washington

26 March 2009

World Trade Organization (WTO) economists forecast an overall fall in international trade of 9% by volume in 2009 after 2 years of declining growth (6% in 2007 and 2% in 2008) and a particularly serious decline in the last 6 months of 2008. The slump should hit the developed countries most seriously with a 10% decline, but even the developing countries' trade is expected to fall by 2-3%. This would represent the biggest such contraction since the Second World War. WTO economists fear that moves towards protectionism could make the outcome even worse than this forecast.

In line with the worsening trade figures the deterioration in the financial crisis has led to a serious cutback in world production growth, especially in the last 6 months of 2008, and world production is forecast to fall by 1-2% in 2009, which would be the first overall fall since the 1930s. This follows world production growth of 3.5% in 2007 and 1.7% in 2008. The synchronized decline of all major economies since September 2008 accounts for the fearsome speed of this reversal of fortunes and the forecasts already take into account the fiscal stimulus measures currently planned at the rate of an unprecedented 3% of world production.

The actual data available for the first 2 months of 2009 on the whole reinforces the gloomy trade outlook for the year as a whole, but if there is any sign of slowing decline or 'bottoming out', it is with the most dynamic economies of Asia. Positive monthly import growth figures were recorded for China (17%) and also for Singapore, Chinese Taipei and Vietnam. This would be encouraging were it not for the most shocking decline in Chinese exports in February 2009. This February fall was 28% on January 2009, or 26% compared with February 2008. Such a figure extrapolated for one year would make Chinese exports reduce to zero. The WTO forecast a leveling out as the more rational prognosis.

Asia’s economic growth (GDP) in 2008 was only 2%, owing in large measure to the negative growth (—0.7%) recorded by Japan. By contrast, developing Asia (excluding Japan, Australia and New Zealand) grew 5.7%, led by China, which registered the fastest growth of any major economy, at 9.0%. Otherwise 2008 growth was strongest in the oil and commodity producing nations, especially the CIS (Russia) and the Middle East. In view of the near collapse of oil and other commodity prices, this growth was curtailed in the second half and should figure far less prominently in 2009.

In the first half of 2008 the euro rose 7% against the dollar and then fell 14% from July to December. The euro had previously gained 30% against the dollar between January 2006 and its peak in July 2008. The British pound, the Canadian dollar and the Korean won all displayed similar trends, falling sharply against the dollar in the second half of 2008, after a long period of appreciation.

The Japanese yen and Chinese yuan behaved differently in response to the financial crisis. Both had appreciated against the dollar in recent years. As the financial crisis took hold, the yen rose sharply against the dollar while the yuan has remained more or less constant.

Trade growth data show declines that are larger than in past slow-downs. A number of factors may explain this:

• For once all regions of the world economy are slowing together.
• Globalize production patterns have created a far greater interdependence in all international trade flows.
• Shortage of trade finance brought about by the weakening of so many financial institutions.
• Creeping protectionism is already discernible and the risk of aggravated protectionism is rightly a source of concern going forward.

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