By Paul Bluett
What is the effect of global trade on this “Great Recession”? (Time Magazine 6.4.09)
Arguably, it stands to prevent this Great recession from becoming another ‘great depression’, but the question remains, will global trade and its benefits remain the proverbial elephant in the corner?
As a child growing up in the 60s in Canberra, at the dinner table, my mother would say, “eat up, think of all the starving people in India”, thanks to global trade, and the green revolution (hybrid agriculture) poverty worldwide since then has been significantly reduced. Such that by recent estimations more than half the worlds population is now middle class (Economist Magazine – ‘Middle class’ in this context is defined as one third of income is available for discretionary spending). Why then do we still have sentiments of restricting trade, despite its obvious benefits?
PNG is a prime example, we have restricted covenants on cement, sugar, chickens, meat, fuel, metal fabrication to name a few. Policies created under the mistaken belief that it’s keeping our Kina in-country, when in fact if we have to pay more for these products, we lose the comparative advantage we have in others. For example, if we’re forced to pay more for fuel from locally produced, uneconomic sources, it may in turn drive up the cost of producing Palm Oil, which we might otherwise produce competitively.
If we look at historic examples of protectionism and it’s effect, in the 1930’s the US created the Smoot-Hawley Tariff, precipitating the world into extreme protectionism, trade wars and the catastrophic social, economic and political repercussions that followed.
In the current ‘Great Recession’ the consensus is we will not degenerate into a global trade crisis or another Great Depression, because of the proliferation of global trade and free market economies.
So what is the theoretical justification for free trade? and how could it benefit PNG?
Trade is the absolute lifeblood of the global economy, is a principal generator of wealth, and is directly or indirectly responsible for hundreds of millions of jobs. Beyond the economics of trade, it is a crucial force in relations between states. As the early 19th century French economist Frédéric Bastiat commented: “if goods don’t cross borders, armies will”. The creation of the European Common Market after World War Two was the most important factor in bringing continuous European warfare to an end.
Take for example Germany, who have recently given an incentive to replace 9 year old cars with new ones by giving a 2500 Euro subsidy (K10,000). Sales shot up, but more than half were not German cars, they were smart enough not to put restrictions on the source, creating flow on benefits for the collective good.
East Asia is a more recent example where the regional battlefield that prevailed for several decades was transformed into a marketplace, resulting in immense benefits of both peace and prosperity for its populations. If other regions of the world, notably South and Central Asia, the Middle East and Africa (the global community’s ‘arc of instability’) could follow the example of East Asia, they too would enjoy more peace and prosperity.
Trade encourages specialisation, which brings prosperity; global capital markets, for all their problems, allocate money more efficiently than local ones; economic co-operation encourages confidence and enhances security. Yet despite its obvious benefits, the globalised economy is under threat.
David Ricardo in 1817 introduced the concept of comparative advantage and demonstrated the benefits of trade, however we see recent attempts to encourage consumers to “buy American” for example, incorporated into US stimulus packages. There was some concern that after the last US election, NAFTA, (The North American Free Trade Agreement, between, Canada, Mexico and the US) would be reviewed.
This anticipated review was quietly dropped signaling that free trade is here to stay, common sense prevailed.
But the current consensus, that there will be no trade crisis, might be overly optimistic. It rests on two arguments. One is that we have learnt from history and the same mistakes will not be repeated. The second is that unlike in the 1930s when there were no rules and institutions governing international trade, today, there are a rules-based, global, multilateral, trading regimes, WTO, IMF, EU etc. The first argument can be dismissed as wishful thinking. As to the second, ultimately institutions are only as strong, or as weak, as the political support they enjoy. And that is why there is reason to worry.
From the moment the GFC (Global Financial Crisis) struck, there was apprehension about the risks of protectionism. The risks are all the greater in that the last two decades have seen the rapid emergence of huge new trade actors wielding considerable economic clout, China in particular, with the capacity to affect considerable global trade imbalances. (see below)
Despite the GFC, the PNG position, as the recent ANZ quarterly report highlighted, is a relatively strong one. But the report critically ignores the elasticity of supply of some of our key agricultural exports, copra for example, whose price dropped in 12 months from US $1600 to $US600 per tonne, supply subsequently dropped by as much as 50%.
Fortunately the expenditure on the LNG gas project is covering some of those shortfalls, so the asymmetric effect is concealed by the good numbers, but such reports fail to show the flow on effects for people who are forced return to subsistence farming for food, instead of selling copra.
We can take heart that our mineral and oil sector is not as effected, even our nickel project has such low costs of production that it can continue even at the current low prices. However some exploration has slowed, Nautilus and some of the smaller miners have had difficulty justifying the costs of continued exploration.
On a global level the key economic players have made their position on trade and protectionism clear in the declaration made at the G20 summit in Washington DC on November 15, which was met with some relief. The trade relevant section contained in paragraph 13 reads:
“We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports. We also agree that our countries have the largest stake in the global trading system and therefore each must make the positive contributions necessary to achieve such an outcome.”
PNG as an emerging gas provider cannot take the benefits and continue to restrict trade in the same breath, get with the program, and trust the process, we will benefit.
If you’ve been following my recent articles, in ‘The Great Recession’ I recommended Blackberry Shares, a few days later they reported improved quarterly results and the shares jumped 20%. Airlines PNG reported a big loss due in part to fuel prices, as noted, but the Dow Jones hasn’t made its drop yet ignoring all the bad news out there.
Please note any advice about shares is meant to be generic and entertaining, please consult your financial advisor before investing.
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