It is incredible that a small crisis, which began in some remote sec tion of US mortgages, has brought forth the current crisis of global proportions. It is no longer a `financial' crisis; it has instead turned into a `real' crisis, touching upon every sphere of the globe from Washington to Tokyo. US and a host of developed countries, including Germany, Japan and UK, have officially slid into recession, casting a shadow on the real demand for goods and services across the world. Even a world recession, akin to that of the 1930s, is not being ruled out. Leading economists fear that if 2008 was a year of financial crisis, the consequences of that crisis on the real economy and global trade would make 2009 a year of declining trade. According to data from the WTO, the quantum of world trade is being adversely impacted by the crisis. Growth in world trade slipped to 6% in real terms in 2007, down from 8.5% in 2006; and in 2008, the volume of international trade shrank by 2%, 27 years later, after it last shrank in 1982. Most countries have also reported double-digit declines in exports in 2008.
Economists reckon that trade and global commerce would be the first casualties of world recession. Many studies in the past have proved that there will be an acute drop in the world trade during recessions. Keeping aside the economics, currently, a host of factors like widening trade deficits of many countries, their depreciating currencies, rising unemployment levels, and falling production are likely to increase the threat of `economic nationalism', forcing the political leaders to adopt `beggar thy neighbor' policies (policies that seek benefits for one country at the expense of others).
Change of guard in the US and their stance towards the world trade, especially towards the closure of the Doha round of trade negotiations, rising protectionist connivery, increasing role of emerging economies, and the role of WTO are prima facie posing new challenges to the world trade.
The Economist magazine warns about the looming risk of protectionism, which originated in the US with the infamous Smoot-Hawley legislation during the 1930s. The legislation had increased the tariffs on 890 items in US as a measure to protect US industries affected by the Great Depression. Later, a similar legislation followed in the Europe. Consequently, a number of countries had to end trade with US and Europe, which further deepened the global recession. Though economists opine that the current crisis is not as serious as the 1930s' depression, major economies are being supported by huge increases in government spending, bailouts and nationalization of key industries. This indicates that the power of governments over the markets is increasing and the governments may take more harsh steps to protect their industries. |
