"But I believe in fair trade, and I will tell you, I have many, many friends heading up corporations, and people that do just business in China, they say it's virtually impossible. It's very, very hard to come into China. And yet, we welcome them with open arm", Donald Trump. Is this the primordial sound of global trade collapsing?
"The World Trade Organisation and other independent analysts are sounding the alarm. In a report released at the end of April, the W.T.O. said that since mid-October the Group of 20 economies - the world's biggest, which account for a vast majority of the world's economic output and trade - had added 124 new restrictive measures affecting about 1 percent of world imports," The New York Times, June 2012.
The WTO is surely worried and with just cause, for this time around the developed world has been dealt a double whammy. On the one hand rising unemployment in a depression like recession is nurturing political support for protecting domestic manufacturing and agriculture, and on the other, the debt crisis has eliminated the all options of financing further trade deficits. Foremost for any austerity drive is curtailing wants and thereby consumption, with the first casualty being imports.
Recall that after the Subprime crisis in 2008, world exports of merchandise fell from USD 16 trillion in 2008 to USD 12.5 trillion in 2009. Admittedly they rebounded to USD 15.2 trillion in 2010 and perhaps a lot of this turbulence was caused by oil prices, but undeniably erosion of wealth in the US shook world trade. At a glance, the havoc wrought by the merchants of finance in the global village is frightening, and the after affects continue unabated.
Live by the sword, die by the sword. Consumerism in America piggy backed on the property boom; the bubble burst, as all bubbles do, and the foreseeable future is now about toil to pay for past extravagance. Amazingly, the origin of the property boom can conceivably be traced back to around the time the dot com bubble collapsed, which on a different note suggests a Wild West type of governance or that the entire nation is a glutton for punishment. Irrespective, the relationship between the Subprime and world exports is quite evident. In 2000 world exports of merchandise stood at USD 6.4 trillion, by 2008 they were a phenomenal USD 16 trillion.
For the form conscious, the data for world export was extracted, after hours of excruciatingly painful research, from WTO reports and for the data relating to Pakistan, the credit goes to the State Bank of Pakistan. Diverging a bit, the website of WTO is extremely content heavy and difficult to navigate through. One would imagine that statistical history of world trade would be a simple table or graph on the net, definitely not the case, wonder why, all the secrecy. In comparison SBP's website was quite user friendly. Kudos to Pakistan!
Coming back to the topic, if destruction of wealth in USA can culminate in an across the board decline in global consumption and consequently world trade, imagine the calamity following the Euro debt crisis. If the entire developed world, rather than spending resorts to penny pinching, who will the developing nations sell too?
Curiously, Pakistan did surprisingly well in 2011. Exports increased by an impressive and record breaking, USD 5.7 billion. Notwithstanding that imports also increased by USD 4.6 billion, this gain in testing times, while deserving applaud, needs careful analysis. Commodity wise details of exports identify that the textile sector lead the charge, however the "why" requires further review. Was the positive variance due to price, product mix or quantity? Were Pakistan's exporters able to penetrate fresh markets, ie controllable actions, or were they simply lucky? Critically, future trade strategy is embedded within these very answers.
The projected results for 2012 reveal the urgency to perform the aforementioned exercise. Total exports declined to USD 24.6 billion from USD 25.3 billion in 2011, while imports increase by another USD 4.2 billion. Increase of approximately USD 2 billion in workers remittance may partially cover the deficit; nonetheless this trade gap is back breaking for the nation. For abundant clarity, increase in value of petroleum imports contributed USD 2 billion only towards the deficit, and textile exports stagnated at USD 13 billion. It is hoped that the commerce ministry is on top of the situation, prolonged monstrous deficits will be fatal. When the going gets tough, the tough get going!
And there are deeper reasons to get Pakistan's trading act together quickly. International transactions have to balance, one way or the other. Trade deficits need to be financed. The American spending spree during the build up to the Subprime was financed by those who exported to them. Low inflation projected dollar as a strong and stable currency thereby inciting those running trade surpluses to invest in dollars. A vicious circle, as the Americans spent more and more, investments in dollar grew more and more. Eventually, universal laws intervened, what goes up must come down!
While the America faced destruction of wealth, those prudent exporters and imprudent investors realised that they were sitting on non-performing debt. The ensuing scramble to cover positions resulted in further confusion. Today the bigger dilemma for investors is selecting a secure mode for storing wealth; this includes nations, corporations and individuals. In this uncertain environment only the gifted or the very brave might have the courage to predict if the dollar or euro will go up or down.
Storing wealth is critical, mode of payment perhaps more so. With uncertainty looming across the financial horizon, will dollar continue to be the international currency? Since the Euro is taking a beating as well, who will be crowned the new king, if at all, remains to be seen. The pessimists might even be advocating a return to the gold standard, however while gold is also magical, it cannot compete with money's ability to create more money out of thin air. Should these concerns come to pass, what will be the impact on world trade is anybody's guess!
An uncertain world does not bode well for developing nations. Not knowing which way the world is going gets everyone going nowhere. Perhaps, if Benjamin Franklin was alive he might reconsider his than, astute observation, "No nation was ever ruined by trade".
Considering that government's plate is already full with fighting an unwanted war, struggling to rid power shortages and managing finance, highlighting another demon waiting in the shadows might not be digestible. Unfortunately, this exigency will also not disappear with time; the music will need to be faced. Future definitely holds trading tribulation.
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