Even though the IMF and other world bodies had anticipated a fall in world trade this year as a consequence of the deteriorating global economy, few expected the decline to be as sharp as the one projected by the WTO in its latest report. World trade which grew at 6 per cent in 2007 and at 2 per cent last year is forecast to drop by as much as 9 per cent in 2009. Such a sharp dip has not been seen since the Second World War. The WTO’s projection exceeds by a wide margin the 3 per cent decline forecast earlier by the IMF and obviously captures the particularly sharp deceleration seen in recent months. According to the World Bank, which analysed the trade data of 45 countries, exports shrank by an average of 32 per cent in January over the previous year. Exports from the rich countries are slated to fall by as much as 10 per cent. Emerging and developing countries, whose exports grew by an average of 15 per cent annually between 1998 and 2008, will fare somewhat better; their exports are expected to fall by 2 to 3 per cent. The current financial crisis has choked trade finance, which is the backbone of global trade, calling for urgent action by monetary authorities.
World trade has been the engine of recent economic growth. Over a 10-year period beginning with 1998, trade volumes grew at a healthy 5.7 per cent on an average every year, outstripping the global GDP growth rate of nearly 3 per cent. However at a time of deep recession, trade channels amplify the economic shocks caused by a sharp demand contraction of the kind that has taken place in all countries. Why the trade decline is universal and synchronised is explained by the rise of global supply chains and “vertical specialisation” in the manufacturing process. Countries no longer specialise in particular products but in the different stages of their manufacture. A fall in demand affects not only the domestic output but also the trade flows to and from several countries. A far more worrying development is the rise of protectionism that can exacerbate the slump. Leaders from some 20 countries, meeting in London later this week, ought to do better than just reiterating their pledge made last November not to raise trade barriers. There is evidence across the globe of protectionist moves: tariffs have been raised in some countries and subsidies are being restored in others. There is a danger of the several gains from years of tortuous multilateral negotiations being whittled down through short-sighted moves of several governments. More than ever before, the Doha round of trade talks seems critical.