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Global Financial Crisis: Implications for Global Trade Lowy Institute June 10

Global Financial Crisis: Implications for Global Trade Lowy Institute June 10. Robert Z Lawrence Harvard Kennedy School & Peterson Institute for International Economics. The Challenge. Financial Crisis Weaknesses of Capitalism? Free Trade? Or Financial System Laissez Faire? .

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Global Financial Crisis: Implications for Global Trade Lowy Institute June 10

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  1. Global Financial Crisis: Implications for Global TradeLowy Institute June 10 Robert Z Lawrence Harvard Kennedy School & Peterson Institute for International Economics

  2. The Challenge • Financial Crisis • Weaknesses of Capitalism? • Free Trade? • Or Financial System Laissez Faire?

  3. Prior to Crisis • 2000 View: Trading system of for Industrial countries but inadequate for development, • (besides China and India). • Response: Doha Development Agenda: • Growth through higher farm prices.

  4. Developing Countries: Widespread Growth

  5. Global Growth Since 2000: The Great Divergence. IMF: WEO Oct 2008

  6. Great Irony • Eight years of trade-led widespread prosperity in developing countries. • (booming commodity prices, exports, foreign investment) • Developing countries running trade surpluses, accumulating foreign exchange reserves. • Disappointing performance in developed countries especially the US (dot.com burst, weak wage growth etc). • No surprise that attitudes shifted in Developed Countries.

  7. The Only Problem: Global Imbalances • Big Questions: • Were borrowers solvent? • Was US spending beyond its means? • Could lenders accumulate? • Could the world add $ claims on US? • Missed totally: the weak link the intermediation process.

  8. How Could it Happen? • Intellectual Reasons. • Political Reasons.

  9. Response to Shock • Capital flows dry up. • Commodity prices plunge. • Trade Flows falling faster than great depression. • Almost no country is spared; Interdependence proven!

  10. Will Mistakes of 30s be repeated? • Fiscal Policy. • Monetary Policy and Financial System Rescues. • International Cooperation. • Smoot-Hawley.

  11. Trading System: Good and Bad News • Good News: • WTO and System based on Rules. • Intellectual Understanding of Dangers of Protectionism. • G20 Commitments and cooperation • Bad News: • Loopholes in Rules. • Political demands for protection. • Increased government involvement provides opportunities for supply • Spillover into trade and project finance.

  12. Wither World Trade? • Short Run—a V an L? • My view: Reverse Check Mark • Good news: Many countries were in reasonable shape. Low inflation, strong fiscal positions, high foreign exchange reserves • We are now seeing the end of the begining

  13. But Major Challenges for Trade • US • short run, impressive fiscal expansion, and federal reserve responses. The central weakness requires US action. • The real conflict for US is between the short and medium term. • Short term politics are easy but longer term how to tighten belts, remove liquidity without inflation. EU: • EU • Can the Euro survive? • Deficit and Surplus Countries. • How to restore growth

  14. Challenges • China: • Towards an internally driven economy? • Implications for other countries. • Decoupling 2.0? • Domestic drivers in Developing Countries. • Opportunities for Commodity Producers like Australia • Financial globalization particularly via private capital markets is going to be constrained. • Export-led growth, via supply-chains that end up in the US and the EU are going to be more limited. • The competition will be for markets dominated by the emerging middle classes in developing countries.

  15. Global Trading System • Doha: Can it be done? • Some good signs. • India, • US, • A more valuable agreement. • Longer Term. • Challenge of a multi-polar common system based on self interest • WTO: Variable geometry and broader agenda? • Regional Agreements: Specialized Roles? • Dangers of self-fulfilling internally driven system

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