Lessons of the De­pres­sion

Finweek English Edition - - Letters - Bask­ing in the glory of cor­rec­tive action may be short lived

RE­MEM­BER THE DRAMA of the G20 – the group of the top 20 in­dus­tri­alised na­tions – and their sum­mit in Wash­ing­ton DC to de­bate the needs of con­certed global action to ad­dress the global eco­nomic cri­sis? Pres­i­dents and prime min­is­ters tri­umphantly agreed not to in­tro­duce any new pro­tec­tion­ist mea­sures and to give added im­pe­tus to con­clud­ing the Doha De­vel­op­ment round.

Mind­ful of how the Great De­pres­sion of the Twen­ties and Thir­ties was pro­longed and made deeper by re­stric­tive, uni­lat­eral trade re­stric­tion – and that trade fell by 70% over a few years – leaders left that im­por­tant meet­ing bask­ing in the glory of dy­namic cor­rec­tive action.

Once home, the op­po­site of what was said hap­pened. China rein­tro­duced tax breaks for ex­porters; In­dia im­posed caps on im­ports of steel; du­ties on car im­ports into Rus­sia were raised. Bil­lion-dol­lar bailouts to car man­u­fac­tur­ers in the United States were an­nounced; France promised to pro­tect com­pa­nies from for­eign preda­tors with more than US$7bn. From In­done­sia to Ecuador to Ar­gen­tine coun­tries have in­tro­duced pro­tec­tion­ist poli­cies.

Trade spe­cial­ists and his­to­ri­ans write that things can’t spin out of con­trol like the Thir­ties, with trade re­stric­tions and com­pet­i­tive de­val­u­a­tion. Now we have the bind­ing rules of the World Trade Or­gan­i­sa­tion – true, but not to­tally. Most coun­try tar­iffs are locked into agree­ments. How­ever, there’s a big dif­fer­ence in many coun­tries be­tween what’s in the agree­ments and what the tar­iffs ac­tu­ally are. That’s the bound tar­iff lev­els and what they are in prac­tice.

If all coun­tries took their tar­iffs up to what’s legally pos­si­ble un­der the WTO, there would be sav­age trade falls. The WTO is the only or­gan­i­sa­tion with a legally bind­ing dis­putes sys­tem that na­tions hon­our. But what if the sys­tem gets over­whelmed with dis­putes that could drag on for years?

Con­grat­u­la­tions to the WTO, which re­cently de­cided to cre­ate a sys­tem to mon­i­tor and pub­li­cise pro­tec­tion­ist mea­sures. All this means we need to cre­ate mo­men­tum, take charge, build con­fi­dence and con­clude the Doha De­vel­op­ment round launched years ago when I was di­rec­tor-gen­eral of the WTO. To stand still, trapped like a pos­sum in the head­lights, is ex­tremely risky and makes the sys­tem vul­ner­a­ble.

I’ve al­ways been a danger­ous, even reck­less, op­ti­mist. How­ever, the fig­ures, the facts and re­al­ity show the cur­rent sit­u­a­tion is pre­car­i­ous. The World Bank sug­gests trade growth will be the low­est since the Sec­ond World War. South Korean ex­ports are down by 30% (as at Jan­uary 2009), com­pared with a year ago. Tai­wan 42% and Ja­pan down 27%. Cargo leav­ing Long Beach, Los An­ge­les, fell by 18% in a year. China’s ex­ports are fall­ing dan­ger­ously: its growth may be cut by a third, cre­at­ing se­vere so­cial dis­tress. Friends re­port the air in Hong Kong and Bei­jing is cleaner than at the time of the Olympics, such is their in­dus­trial con­trac­tion.

Oil price fore­casts are a use­ful guide to fu­ture in­dus­trial growth. The Baltic Dry in­dex – it mea­sures freight ra­tios of bulk com­modi­ties such as grain and iron ore – has crashed by 97%. Lloyd’s re­port there are miles of ships an­chored off Sin­ga­pore and else­where and that ship­ping com­pa­nies have of­fered to waive fees on con­tain­ers in some places, just charg­ing bro­ker costs to move half-full ships and main­tain some cash flow.

That can’t work for long. How can head­lines of ship­ping rates hit­ting zero for the first time since records be­gan, of the Bank of Eng­land hav­ing the low­est in­ter­est rates in 400 years since records have been kept not wake up those in se­ri­ous po­si­tions of power?

Here’s some­thing you don’t hear ev­ery day from a politi­cian, even an ex-politi­cian: “We don’t know what will work, how long this cri­sis will con­tinue. We do know what won’t work, be­cause it’s been tried. We do know that pro­tec­tion­ism will make things worse. We know that global trade has in­creased quicker than do­mes­tic trade and growth. We do know we’re all in this to­gether; that no na­tion can suc­ceed on its own. Our suc­cess is based on other’s suc­cess – and that’s a healthy thing.”

His­to­ri­ans should write of the great fol­lies of this decade, be­ing the un­reg­u­lated, in­sane, opaque lend­ing and lever­age prac­tices of global fi­nan­cial com­pa­nies. The re­luc­tance of politi­cians to take a few lo­cal hits, for their wider ben­e­fit, by con­clud­ing the Doha Trade Round, the slow ac­cep­tance of the im­por­tance of China, In­dia, Brazil and Rus­sia at the top ta­ble of de­ci­sion­mak­ers and the his­toric stu­pid­ity of not ne­go­ti­at­ing Rus­sia into the WTO and hav­ing firm, pre­dictable, bind­ing rules for the ex­port of en­ergy in­her­ent in such a deal.

There’s a whiff of an eco­nomic Mu­nich in the air. I ex­pect to see politi­cians with um­brel­las and mous­taches mut­ter­ing “Peace in our time” yet again when leaders as­sem­ble at the G20 and APEC meet­ings, know­ing full well that, for a decade, their sum­mit com­mu­niqués are well mean­ing but mean­ing­less, be­cause they’re never im­ple­mented.

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