Editorial Notes

[Editorial Notes] Trade in tatters: On the global slump

The only certainty right now in a pandemic-gripped world is the all-enveloping uncertainty. And the WTO acknowledged as much when it released its outlook for global trade recently.
By IASToppers
April 16, 2020

Contents

  • Future Trade projections by WTO
  • Comparison between current crisis and 2008 financial crisis
  • Way Forward
  • Conclusion

Trade in tatters: On the global slump

For IASToppers’ Editorial Simplified Archive, click here

Future Trade projections by WTO

  • WTO said that the disruption and resultant blow to trade will in all likelihood be far worse than the slump brought on by the global financial crisis of 2008.
  • Projecting merchandise trade to plummet between 13% and 32% in 2020, WTO added a categoric caveat: at the moment, it is only able to posit a wide range of possible trajectories for the predicted decline in trade given the nature of the health crisis and the uncertainty around its precise economic impact.
  • The tight restrictions on movement and social distancing norms across geographies have led to severe curbs on labour supply, transport and travel and the shuttering of whole sectors from hotels and non-essential retail to tourism and significant parts of manufacturing.
  • The WTO expects all regions, save Africa, West Asia and the Commonwealth of Independent States, to suffer double-digit declines in exports and imports this year even under its “optimistic scenario”, which postulates a recovery starting in the second half.
  • Global supply chains have increased in complexity, especially in industries such as electronics and automotive products, making them particularly vulnerable to the current disruptions, with countries that are a part of these value linkages set to find trade more severely impacted.
  • Also, services trade — in which India has a higher global share as an exporter ($214 billion, or 3.5%, in 2019) than in merchandise exports — may be significantly affected by the transport and travel curbs.
  • A small sliver of silver in this bleak outlook for services trade is the role that the WTO sees for information technology services as companies try to enable employees to work from home and people order essentials and drugs online and socialise remotely.
  • India’s IT exporters have been busy supporting their overseas clients’ business continuity plans in this pandemic and may find this hand-holding at a time of dire need earning them loyalty-linked business when economic activity revives. 
  • As per IMF, the global economy is set to contract sharply in 2020, with “the lockdown needed to fight” the pandemic affecting billions worldwide.

Comparison between current crisis and 2008 financial crisis

The WTO and the IMF chief have pointed to the fact that unlike the recession that accompanied the global financial crisis in 2008, the current downturn is unique.

Three major economic similarities

Uncertainty:

  • Both crises share uncertainty as a key factor in their emergence and spread. In other words, it is a risk that cannot easily be traced so that its probability of occurrence and its impact can hardly be measured.
  • This applies both to coronavirus and to the type of loans granted to Americans with “Neither Income Nor Jobs & Assets” (NINJA) until 2007. The latter toxic risk was hidden and transferred via apparently sound securitized assets and financial vehicles so that nobody knew where and how significant the risk was. This resulted in a freezing of national and, then, international financial relationships.
  • The same phenomenon is happening with the COVID-19 Crisis.

Collapse: 

  • The initial drops in the stock exchanges of major countries are analogous between both crises. In both cases, markets were allegedly overvalued.
  • Even if there is a rebound before the end of 2020, the global recession will likely be up to several percentage points of annual gross domestic product (GDP).

Reactions:

  • The spillover effects of the 2008 crisis were related to what were later called “Global Systemic Important Banks” (G-SIB) with knock-on effects across borders. Similarly, the COVID-19 Crisis has revealed the dependence of mature economies on some inputs produced only or mainly in other countries; this is perceived as jeopardizing their sovereignty.
  • As a result of these major shocks, economic policies to provide support—both monetary and fiscal—, has to be massive. In both cases, there is a major comeback of the roles of the public authorities, the scope of regal (sovereign) powers and the call for better regulations.

Way Forward

  • There is need for bringing on a second round of an economic relief package that goes well beyond the first both in terms of the financial commitment and the spread. 
  • The bankruptcy code should be suspended for the next six months, at least for MSMEs.
  • Lenders, including NBFCs, should be granted freedom to reschedule their loan accounts so that borrowers are not under pressure to repay for fear of turning delinquent. A credit guarantee fund that will support non-delinquent borrowers for the next six months will be a good option.
  • There should be no GST for the next three months. This might result in loss of ₹3-lakh crore, but in reality it will be much lower than that because economic activity is at a standstill now.
  • This will ease cash flows for business and also obviate the need for statutory compliances at a time when the focus will have to be on getting businesses back on track.

Conclusion

  • As the WTO observes, a rebound in global economic activity will require trade to flow freely across borders as vitally as any fiscal or monetary stimulus.
  • The world will be best served if nations do not turn insular and erect new barriers to the movement of goods, services and people in the aftermath of the pandemic.
  • The current crisis requires dual global support on both monetary and fiscal front, which require a major comeback of the roles of the public authorities, the scope of sovereign powers and the call for better regulations.

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