Lessons of the Depression
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.