Even as the world economy is recovering, the role of trade in nurturing and reinforcing economic growth has come into sharper focus. Though not for the first time, the World Trade Organization has argued forcefully for a wrap up of the nine-year old Doha round.
The International Monetary Fund in its latest assessment is positively upbeat on global economic growth. However, all organisations realise that there are risks which can derail the already fragile growth.
For instance, the IMF has listed the following major risks.
(a) Uneven growth across the globe: China, India and a few other big emerging economies are providing much of the impetus to growth at the global level. The world's advanced economies are lagging behind the developing ones.
(b) The problem of global imbalance remains: An orderly winding down seems to be an unlikely prospect in the near future.
(c) More recently, the European debt crisis has surfaced. It has now become a generalised threat to the global financial sector. That is because the bigger European and American banks, which were at the epicentre of the financial crisis, hold a substantial portion of government paper issued by countries that are seen to be vulnerable.
Fiscal consolidation
Elsewhere too countries not facing a debt crisis have embarked upon a programme of fiscal consolidation. In the prevailing circumstances, encouraging trade, especially multilateral trade, would seem to be an ideal way to promote growth.
Trade does not involve government expenditure and is compatible with a programme of fiscal consolidation.
Addressing a group of businessmen who were attending the G-20 Summit in Toronto, WTO Director General Pascal Lamy urged the political leaders to “inject action in the Doha round”. Trade is as important as the ongoing emphasis on fiscal consolidation. Trade as an engine of growth needs to be an integral part of the framework for sustainable, balanced growth which the G-20 has been putting together since the Pittsburgh Summit (of G-20). Trade has been a major casualty of the crisis. In 2009, it fell by an unprecedented 12 per cent. The ratio of global trade to GDP declined by a third as international supply chains magnified the contraction and distributed it worldwide.
Even though trade is on the rebound this year — the WTO says it will grow by 9.5 per cent — there are major threats on the way. There is a strong correlation between trade volumes and economic recovery. Any risks to growth will naturally impinge on trade development. Trade has a firm role to play in anchoring economic recovery.
The two major economic factors that have a bearing on trade are the persistently high unemployment levels in the U.S. and certain other advanced economies; and the deteriorating fiscal situation in many countries necessitating strong government action to rein in the fiscal deficits. Both these affect trade directly and indirectly.
Unemployment
In the advanced countries unemployment is projected to stay close to 9.5 per cent through 2011 and then to decline only slowly. High levels of unemployment, a consequence of ‘job-less' growth, have revived the latent protectionist tendencies among politicians of the advanced economies.
In the U.S., tougher visa rules and steps to discourage outsourcing of business are two examples. Creating tariff walls against imports from countries such as China is another instance.
The high public indebtedness of many European countries has prompted moves aimed at fiscal consolidation. At the recent Toronto meet there was unanimous agreement to halve the budget deficits by 2013. Other countries such as the Great Britain have announced unprecedented austerity measures. In the process, they are completely reversing the age-old thrust of fiscal policies as a means to achieve welfare goals.
Besides, nearly all countries are contemplating phasing out of the fiscal and monetary stimulus measures introduced at the height of the economic crisis. The upshot of all this will be that the economies will no longer be supported by local demand.
Consequently, all countries will be forced to look at external demand. Experts fear that this may lead to extreme competition and possibly unethical trade practices.
There is a realisation that despite all the professed benefits of free trade, countries are unable to take a long-term view. Trade has remained a captive of short-term factors.
The WTO says that even if the much feared surge in protectionism has not happened, countries are reluctant to withdraw the trade restraints already in place.
Thus, even though there may not be a large number of new restraints, it is their accumulation over time that is a bigger worry.
As for the Doha round, the outlook remains as bleak as before. The WTO has claimed that 80 per cent of the negotiations have been completed. But agreement on the balance has been hard to come by. That, as far as the Doha round is concerned, is a familiar story. At the Toronto meeting the G-20 countries dropped their 2009 pledge to complete the Doha round this year. So there is not even lip service to the cause of multilateral trade under the aegis of the WTO. What is needed is a much superior arrangement for conducting rule bound trade to any devised before.
