As far as international trade is concerned, the G-20 meeting cannot occur a moment too soon.
The World Trade Organization (WTO) has just issued a report predicting that global trade will plunge about nine percent in 2009 -- the worst performance in the 62 years the WTO has been keeping such records. The takeaway from the findings, based on new data for the first months of the year, couldn't be clearer: The economic crisis is having a devastating effect on world trade, and further adverse developments in the financial markets could prolong the misery. The question now is whether the developed-nation leaders meeting this week in London will take the steps needed to ease the global slump and get the economy back on a sustainable growth track.
Developed world hit hard
Break down the WTO's numbers and it's not pretty: In January, China's exports plummeted -26 percent; Japan's, -35 percent; Germany's, -28 percent, Canada's, -34%; and the U.S.'s, -21 percent..
Overall, developed-world trade is expected now to fall -10 percent in 2009; the developing world will fare somewhat better, at about -3 percent. Those drops compare to a global trade increase of 2 percent in 2008 (up to $15.8 trillion). Adding insult to injury, global GDP is predicted to contract by about -2 percent.
The WTO said four factors have lead to the trade contraction: 1) the synchronized global recession -- the world's first in the modern era, 2) tapped-out consumers in developed countries, who overspent during the recent economic expansion, 3) the globalized supply chain, where lower demand for goods in the U.S or E.U. leads to factory closures in China, and, most ominously 4) an uptick in protectionism, with countries as Russia and Mexico starting to break their free-trade promises and impose tariffs.
Economic Analysis: The era of "make the best, then ship it to the west," is over. One factor that helped create the current contraction -- and a key structural imbalance in the global economy -- is a world that was too dependent on U.S. consumption for GDP growth. The global economy must move to a system of multiple, regional demand centers. That means nations like China, India, Japan, Brazil, and Russia must do more to open their markets and increase consumption among their new middle classes, or risk a lengthy global recession.
Further, G-20 leaders meeting this week in London must remain committed to free trade, and turn back protectionist pressures. They'll do well to remember it was protectionist measures after the collapse of the banking system in 1929-32 that helped prolong the Great Depression.
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