You are here: Home » Opinion » Breakingviews
Business Standard

Fight for the flows

John Foley 

Global trade: Trade, the world’s economic axle grease, is in danger. Weakening flows of goods and services across the world turned 2008’s financial meltdown into a global economic crisis. Demand in the West is slowing.

If trade finance and openness also come under pressure, the World Trade Organisation’s estimate of 6.5 per cent trade growth in 2011 could prove wide of the mark. A demand slowdown from America (imports slid 0.8 per cent from May to June) and the eurozone (fell four per cent) is creating waves. Between the first and second quarters of 2011, export growth halved in China, and turned negative in Hong Kong, Japan, Malaysia and Taiwan, after stripping out seasonal factors, HSBC estimates.

High volatility makes matters worse, since it deters manufacturers from committing to investment plans, delivering an extra blow to GDP growth. Trade finance is also important. When banks faced a liquidity crunch in 2008, some lenders pulled funding for small exporters and risky countries. Others raised prices. Costs for small exporters doubled, while the all-important syndication of trade loans among banks plunged. Things look sturdier now.

The World Bank, Asian Development Bank and governmental credit agencies stepped in to provide backstops by way of loans and debt guarantees, and are still doing so. That means while trade finance got more expensive during the crisis, according to a January IMF study, volumes fell by just 10 per cent. Since then, prices have come as banks return to the sector. True, a thorough-going banking crisis in Europe would create significant strain.

While trade finance has super-low default rates — 0.02 per cent over five years, according to the Asian Development Bank — prices could again shoot up if banks abruptly repatriate capital. Worse, bank watchdogs in Basel are proposing asking banks to hold more capital against trade finance, making it a less attractive business. The fears circulate at an unfortunately delicate time. Finally, there’s protectionism. While friction between the US and China has eased, exchange rate shifts open wounds elsewhere.

Japan and Switzerland have both intervened to prevent their exports from becoming uncompetitive. Brazil’s president has proposed that Latin America raise barriers to fend off cheap imports — while US free trade agreements with Korea, Panama and Colombia are forever delayed. The WTO warned in May that export restrictions are on the rise faster than any time since the crisis. That’s the last thing the global economy needs. The previous slump produced strong statements from global leaders about the importance of free and fair trade. Those pledges should be reaffirmed, and acted upon.

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Wed, August 31 2011. 00:28 IST
RECOMMENDED FOR YOU