TWN Info Service on WTO and Trade Issues (June09/01)
2 June 2009
Third World Network

Global economic crisis progressively affecting trade
Published in SUNS #6699 dated 13 May 2009

Geneva, 12 May (Kanaga Raja) -- It is important to protect the significant progress that developing countries have made in recent decades in producing viable exports and in participating in the world economy so that trade can help them recover from the global economic crisis, participants told the Trade and Development Commission of UNCTAD on Monday.

"We have not yet seen the depth of the impact on developing-country economies," UNCTAD Secretary-General Dr Supachai Panitchpakdi cautioned in opening a high-level discussion at the Commission on "the impact of the global economic crisis on trade."

The Trade and Development Commission began its first session on Monday and is meeting till Friday.

Supachai told the meeting that less-advanced economies are facing a series of difficulties: drops in demand for exports; deficits in credit and finance, especially trade finance; falling prices for basic agricultural goods and industrial raw materials; declining remittances for citizens working overseas; and a contraction in foreign investment.

"We should expect all of these things to gather force through the year," he said, noting that the global economic crisis didn't hit the developing world rapidly, as it did the United States and Europe, but has been "gradually emerging and penetrating the developing economies through various means."

Trade has been vital for hard-won economic progress in Asia, Africa, and Latin America. The degree of dependence of developing economies on external markets, measured by export-to-gross domestic product (GDP) ratio, nearly doubled from 26% in 1995 to 51% in 2007. For least developed countries (LDC), the ratio rose from 17% to 45% over the same period.

Links to the global economy now mean that the crisis is spreading inexorably to poorer nations, the Secretary-General said, and it is important for stimulus packages in wealthy countries to help boost demand for products on global markets.

International efforts such as Aid for Trade and funding -- as promised by last month's G-20 summit in London -- for stimulus packages in developing countries and for financing trade, which has diminished with the banking crisis, also are vital, said Supachai.

UNCTAD has estimated that developing countries and transition economies will see export declines of 7-9% in 2009, while LDC exports may drop from 9-16%.

"This comes at a time when we had become successful at raising the issue of global integration, of linking emerging economies into the world economy," Supachai said. "This used to be a positive factor."

"We need to be serious in our rethinking of globalization. We need a new deal on aid, trade, investment and technology relations -- new solidarity," the Secretary-General stressed.

Supachai also introduced an UNCTAD report titled "Global economic crisis: implications for trade and development."

According to the report, the ongoing global financial and economic crisis has the potential to usher in a period of a global recession that may seriously undermine all countries' process of economic growth and transformation, and also jeopardize efforts to widen economic and social opportunities and improve the livelihoods of ordinary people everywhere.

In particular, the crisis may put a brake on and also reverse efforts in developing countries and by the international community to assure development gains from trade, promoting achievement of internationally agreed development goals including the Millennium Development Goals (MDGs) by 2015.

The crisis has triggered a slowdown in global economic growth that is manifesting itself in a demand-driven fall in international trade exacerbated by the deficit of credit and trade finance; falling commodity prices; declining remittances; contracting foreign direct investment (FDI); and the potential of declining official development assistance (ODA). These effects have been superimposed onto the ongoing global food crisis, volatile energy prices, and climate-change challenges, said the UNCTAD report.

Addressing the dampening impact of the crisis on international trade and investment to restore growth, and reviewing development policies and partnerships to create sustainable practices and greater resilience to future shocks, must be key priorities in the multilateral agenda.

At the international level, said the report, restoring trade finance and mitigating the risk of increased protectionism are immediate challenges. Concluding the WTO Doha Round on balanced and pro-development terms will help, as well as harvesting some of the key development deliverables such duty-free and quota-free treatment for least developed countries (LDCs). Maintaining and increasing ODA, including through aid for trade, will be important too, especially to build and strengthen productive capacities of developing countries, and related trade-efficiency and facilitation infrastructure.

At the inter-regional and regional levels, expanding and diversifying South-South cooperation is a viable solution to support and to increase developing countries' trade and investment performance. The crisis offers opportunities for strengthening South-South trade and investment linkages, including through reshaping the existing production supply chains (and creating more regional demand). Available policy instruments such as the Global System of Trade Preferences among Developing Countries (GSTP) and more comprehensive and effective regional trade and investment agreements should be consolidated and enhanced.

At the national level, said the UNCTAD report, the crisis has made it timely to review development strategies so as to make them more sustainable against future external shocks, focused on delivering broad-based and inclusive development, and responsive to the imperatives of preserving the environment, while also providing new economic opportunities.

Developing countries need to continue to address income inequality and to invest more in education, training, trade-adjustment assistance, health care, community development and tax policy. The role of the state in promoting development has increased in light of the crisis, and there is a need to reflect on how this role can be effectively articulated, the report stressed.

A chief concern at the meeting was that signs of recovery in industrialized nations may lead to a widespread conclusion that the crisis is over, when in fact it may continue for a long time elsewhere in the world. Participants at the high-level discussion said that a global exit strategy is needed from the economic and financial turmoil. They also cautioned against protectionist tendencies in the face of the crisis.

Mr Jan Fredrik Qvigstad, Deputy Governor of the Norwegian Central Bank, spoke of the effects on sovereign wealth funds largely maintained by countries with abundant natural resources. The Norwegian fund, the third largest in the world and based on oil and natural gas extraction, had lost 23% in 2008, and it was a very challenging task to tell the public that roads and schools could not be fixed because 25% of the government's profit must be invested in a sovereign wealth fund overseas each year when the fund had just lost 23%.

Ambassador Trevor Clarke of Barbados told the meeting that the crisis is affecting remittances, tourism, and investment for small developing countries such as his own. The challenges posed need to be taken seriously, he said. Those who lose their jobs in such countries - and that is occurring more and more - have few options for finding new employment. The ongoing food and fuel crises and the climate change crisis also have to be taken into account.

National measures to protect industries and jobs and increase domestic demand can be taken by large developed countries but not by small developing nations. It is time to review development strategies, Ambassador Clarke said. More has to be done to make such strategies more sustainable against future economic shocks, and to enable them to deliver benefits more durably and broadly. UNCTAD should visit such countries and help them with this task, he added.

Ambassador Mothae A. Maruping of Lesotho said that the financial crisis was becoming an economic, social, and political crisis, and it was frightening to hear that the full impact was yet to come. The crisis had spread so quickly because of the same globalization which had been so helpful for economic growth.

Least developed countries are particularly vulnerable to the crisis, said Ambassador Maruping, since most have high rates of unemployment, limited social safety nets, and high levels of debt. They have few options for responding to external shocks, and it is clear that effective steps to help them must come internationally.

Mr Josef T. Yap, President of the Philippine Institute for Development Studies, reviewed the impact of the crisis on developing East Asia, saying that the immediate effects had included the freezing of credit markets, the re-pricing of risk, which made it more expensive to borrow internationally, and a shortage of trade finance.

Steps taken in response to the 1997 Asian financial crisis had helped to some extent to protect the region this time, he said, noting that financial institutions, burned once, had built substantial reserves and were more conservative in their lending and investments.

However, the impact of the crisis on the "real" economy is extensive - effects are being felt in reduced demand, production, and employment. Declines in exports are growing progressively worse. Uncertainty about the length and depth of the recession is still a concern, Yap said.

It is important to accelerate intra-regional trade and investment, he added, to strengthen local and regional markets; and to re-balance growth so that it is less dependent on Western markets, in part through establishing an Asian investment infrastructure fund.

And Rashmi Banga, Senior Economist of the UNCTAD India Project, said it is clear that the crisis is having different effects on different countries and peoples. Each country should undertake a detailed study to foresee the effects and to plan responses. Such a study had been done by the India Project at the request of the Indian Government. It showed that exports began to decline in the third quarter of 2008, but efforts to diversify exports and target markets have slowed the impact. Vulnerable sectors include gems, jewelry, and textiles.

The study indicates that India can expect flat growth or a small decline in 2009-2010. Export increases are expected for 2010-2011, along with increased employment. Among potential responses, the study recommends streamlining customs procedures to reduce costs and speed processing, said the Indian economist.

Several country groupings made opening statements at the first session of the Commission.

Thailand, on behalf of the G77 and China, said that without addressing the root causes of the current global economic crisis, there will always be the risk of another crisis. Short-term measures may indeed help to mitigate the effects of the crisis, but they will not create the resilience and sustained basis for preventing future crises and promoting broad-based and inclusive development. The global financial and economic crisis, coupled with the ongoing challenges in the areas of food, energy and climate change, is presently inflicting severe economic hardships and social problems in most developing countries in all regions, particularly least-developed countries.

International trade, one of the engines of economic growth and development finance, has witnessed dramatic declines since late 2008, said the G77 and China, pointing out that the WTO recently forecast that the collapse in global demand brought on by the economic crisis will drive exports down by roughly 9% in volume terms in 2009. Similar indications and analyses by other organizations, including UNCTAD, predict a continuation of the recession or anemic growth this year and into 2010.

"Such a situation not only leaves the lives of our peoples in serious jeopardy, but it also jeopardizes the achievement of the internationally agreed development goals, including the Millennium Development Goals, by developing countries."

The Group pointed to the need to look at a re-thinking and re-focusing of trade and development policy, such as how to promote a more inclusive development policy, how to generate more broad-based growth and the need to promote regional economic integration among developing countries.

Turning to the subject of energy-related issues from the trade and development perspective, a substantive agenda item of the first session of the Commission, Thailand said that given the imbalance between supply and demand for energy, with the growth in demand exceeding supply, there is a clear need to invest in new sources of conventional and non-conventional energy sources, and to diversify the energy mix, especially toward cleaner and renewable energy.

Brazil, on behalf of the Group of Latin American and Caribbean Countries (GRULAC), said that the crisis has negatively impacted trade in goods and services as well as FDI flows, reducing economic growth and making it more difficult to achieve the MDGs. In the GRULAC region, exports-to-GDP ratios increased from an average of 13% in 1995 to almost 30% in 2007, which indicates how harmful global trade decline can be to the region.

South-South trade in general - which had been increasing in importance, and constituting one of the most dynamic components of international trade in recent years - has also been affected by the crisis, said GRULAC, adding that it supports all efforts to reactivate trade and fight protectionism. In this respect, the Group encouraged actions aimed at injecting liquidity in the trade finance market, considering that 90% of international trade transactions involve credit and that the liquidity crunch constitutes a means of contagion of the financial crisis to the real economy.

Furthermore, the credit crunch and a heightened risk aversion displayed by the developed countries' financial system is likely to disproportionately affect exporting interests of developing countries. GRULAC believed that the multilateral trading system is an indispensable tool against protectionism and reiterated its call for an expeditious and development-oriented conclusion of the Doha Round negotiations. Furthermore, initiatives such as Aid for Trade should be deepened.

With regards to energy-related issues, GRULAC attached great importance to the issue of energy, as its regards it as an essential aspect of sustainable development. The Group said that it supports a non-discriminatory approach in this area, which includes a fair consideration of renewable energies, with a view to promoting an increase in the sources of cleaner energy.

Bangladesh, on behalf of the Least Developed Countries (LDCs), said that the challenges facing the least developed countries relate to lack of durability or sustainability of economic growth. Over-dependence on a few export commodities, goods and services is also part of the problem of economic vulnerability and instability of the LDCs. "Consequently, our economies remain fragile to various shocks - economic or otherwise; exogenous or endogenous."

For the LDCs to widen their economic base and to mitigate their vulnerability, building and developing their productive capacities should be given urgent priority. In this regard, added assistance from their development partners is crucial, said Bangladesh. The current global economic downturn has already started to severely constrain the growth and development prospects of the LDCs. It has exacerbated their vulnerability and marginalisation. It has undermined global efforts to fight poverty in these countries.

Because of the crisis, said Bangladesh, possibilities of attaining the Millennium Development Goals (MDGs) and Internationally Agreed Development Goals (IADGs) within the target dates now appear even further. UNCTAD projects that the LDC exports will diminish by 9-16% this year.

Bangladesh underscored that the LDCs have become victims of the crises which are not of their own making. The international community, especially the development partners, should do more to help LDCs cope with the current crises including by immediately opening up their markets for LDC goods and services, facilitating access to finance and by encouraging FDI flows and transfer of green and renewable technologies to LDCs. Deploying development resources to poor countries to avoid eminent economic collapse, human suffering and socio-political disruption should be viewed as a priority and an integral part of a globally coordinated response to the crisis.

Bangladesh highlighted four key issues for the least developed countries. First, it will be crucially important that developed countries and developing countries who are in a position to do so, immediately provide duty-free, quota-free market access to all products originating from all LDCs.

In this regard, developed countries must commit and fully implement the decision on duty-free, quota-free market access as contained in Annex F of the WTO Hong Kong Ministerial Declaration, including through agriculture and non-agricultural market access, with a view to ensuring commercially meaningful duty-free, quota-free market access for at least 97% of products originating from LDCs defined at the tariff line level end of 2009.

Commitments by the developed countries to grant duty-free, quota-free market access for the remaining 3% should be made at the earliest and by the end of the Doha Round implementation period.

Secondly, said Bangladesh, the cotton issue must be resolved immediately. It said that volatile prices for commodities have led to income instability and hardships, in particular for the LDCs. Many of them are dependent on a single or a few commodity exports. The inability to diversify from traditional commodities had made commodity-dependent LDCs extremely vulnerable to price shocks. The dwindling prices of commodities during this economic crisis have further aggravated their sufferings.

Bangladesh further said that trade barriers and domestic support to agricultural commodities such as cotton, sugar and ground nuts depress the terms of trade for those LDCs that have comparative advantage in these commodities. Commitments to reduce these impediments to LDC exports of agricultural products in the Doha Round are yet to be honoured.

Thirdly, the LDCs are fully aware of climate change and its dire consequences. Many of the LDCs are small islands or low-lying coastal countries. Despite being the least polluters, they are the major victims of environmental degradation caused by others. The international community must provide necessary funds for LDCs to cope with environmental challenges.

Fourthly, said Bangladesh, services constitute about 50% of LDC economies. In order to exploit LDC comparative advantage, market access needs to be provided for sectors of export interest to the LDCs, particularly under Mode 4 (movement of natural persons).

The constraints faced by the LDCs, specifically the lack of institutional and human capacities in analysing offers and making requests should be factored into the negotiating process in general and into the individual requests made to the LDCs, said Bangladesh. +