Global Financial Crisis: Implications for Global Trade Lowy Institute June 10 Robert Z Lawrence Harvard Kennedy School & Peterson Institute for International Economics

The Challenge Financial Crisis Weaknesses of Capitalism? Free Trade? Or Financial System Laissez Faire?

Prior to Crisis 2000 View: Trading system of for Industrial countries but inadequate for development, (besides China and India). Response: Doha Development Agenda: Growth through higher farm prices.

Developing Countries: Widespread Growth

Global Growth Since 2000: The Great Divergence. IMF: WEO Oct 2008

Great Irony Eight years of trade-led widespread prosperity in developing countries. (booming commodity prices, exports, foreign investment) Developing countries running trade surpluses, accumulating foreign exchange reserves. Disappointing performance in developed countries especially the US (dot.com burst, weak wage growth etc). No surprise that attitudes shifted in Developed Countries.

The Only Problem: Global Imbalances Big Questions: Were borrowers solvent? Was US spending beyond its means? Could lenders accumulate? Could the world add $ claims on US? Missed totally: the weak link the intermediation process.

How Could it Happen? Intellectual Reasons. Political Reasons.

Response to Shock Capital flows dry up. Commodity prices plunge. Trade Flows falling faster than great depression. Almost no country is spared; Interdependence proven!

Will Mistakes of 30s be repeated? Fiscal Policy. Monetary Policy and Financial System Rescues. International Cooperation. Smoot-Hawley.

Trading System: Good and Bad News Good News: WTO and System based on Rules. Intellectual Understanding of Dangers of Protectionism. G20 Commitments and cooperation Bad News: Loopholes in Rules. Political demands for protection. Increased government involvement provides opportunities for supply Spillover into trade and project finance.

Wither World Trade? Short Run—a V an L? My view: Reverse Check Mark Good news: Many countries were in reasonable shape. Low inflation, strong fiscal positions, high foreign exchange reserves We are now seeing the end of the begining

But Major Challenges for Trade US – short run, impressive fiscal expansion, and federal reserve responses. The central weakness requires US action. – The real conflict for US is between the short and medium term. – Short term politics are easy but longer term how to tighten belts, remove liquidity without inflation. EU: EU – Can the Euro survive? – Deficit and Surplus Countries. – How to restore growth

Challenges China: Towards an internally driven economy? Implications for other countries. – Decoupling 2.0? – Domestic drivers in Developing Countries. – Opportunities for Commodity Producers like Australia Financial globalization particularly via private capital markets is going to be constrained. Export-led growth, via supply-chains that end up in the US and the EU are going to be more limited. The competition will be for markets dominated by the emerging middle classes in developing countries.

Global Trading System Doha: Can it be done? – Some good signs. – India, – US, – A more valuable agreement. Longer Term. – Challenge of a multi-polar common system based on self interest – WTO: Variable geometry and broader agenda? – Regional Agreements: Specialized Roles? – Dangers of self-fulfilling internally driven system