Global Financial Crisis and Reversion to Protectionism

1.0 Introduction
According to the economists, world is currently facing to the worst ever global financial crisis since 1930 world’s great depression. Currently this financial crisis is affecting most of the countries all over the world, not only developed countries but also developing countries as well as least developed countries facing financial difficulties. The Global Financial Crisis already has started to threaten in short term objectives as well as long term objectives such as achieving millennium goals. Stocks markets are falling dramatically all around the world, interest are going up, higher unemployment rates in even in developed countries, exports are going down continuously due to decrease in demand and financial markets have been collapsed.

2.0 Discussion
2.1 Global Financial Crisis as it happened
This debate is going on for recent year in order to identify the real causes of recent global financial crisis. After all studies shows that Global Financial Crisis started with US dramatic subprime mortgage crisis. In early 2000s US housing market were on a rise. Housing prices were going up dramatically and this made most of the people engaging on buying houses. In order to purchase houses they went for mortgage and housing loans. With soaring profits banks were lending money without having a clear idea about the risk they are taking. Every wants a house, so everyone was getting loans and mortgage. People who had no income, no job, no assets were also able to get mortgage and housing loans. Back then this was not a major problem because US interest rates were very low historically. Interest rates were 1%. Even though the risk was high, with soaring profits, everyone wants in. so starting in Wall Street others followed.

(Ravenhill, J. 2011).

Banks borrowed more money that they could lend more and create more securities. But when the housing bubble burst and interests were rising up to 5.35% in 2006 everything changed. People had no way of paying back their loans so they became bad depts. And also back then banks were increasingly depends on the financial market not traditionally deposits and savings. When all these financial institution felt the threat they were little too late. Most of the financial institutions in US were falling apart. Starting from 2007 every month more financial institutions was filling for bankruptcy. Well know companies such as Lehman Brothers were falling apart and this lead to a new phrase in the global financial crisis. Even UK banks such as Northern Rock were affected badly. Crisis which started with US subprime Mortgage crisis drove world to a one of the major financial crisis ever hit. This made US government to announce limited bailout for the people who were unable to pay their debts and also had allocate $900 billion for the rescue mission of this crisis.

Not only US but worldwide markets affected by this dramatically and world economy slowed down. European markets also started to feel troubles with their debts. After all this crisis lead to global recession which still affecting whole world. (Erixon, F. 2009)

2.2 Current Situation of Global Financial Crisis
Current situation of Global Financial Crisis looks more threatening. The world economic situation and prospects continue to be challenging. Recent studies shows that most developed economies such as US and Europe are still struggling to find solution to overcome this disaster. Process of achieving millennium goals has been delayed. Global economic growth is slowing down continuously. Downside risks for further weakening of global economic conditions remain unabatedly high. Researches indicates that four major weaknesses which are holding back any kind of a recovery. First, continued deleveraging by banks, firms and households is holding back normal credit flows and consumer and Investment demand. Second, unemployment remains high, a condition that is both causes and effect of the lack of economic recovery. Third, fiscal austerity responses to deal with Rising public debts are further deterring economic growth, which in turn is making a Return to debt sustainability all the more difficult. And fourth, bank exposure to sovereign Debts and the weak economy are perpetuating financial sector fragility, which in turn is Spurring continued deleveraging. (World Economic Situation and Prospects (WESP), 2012)

One of the major problems World facing at the moment is higher unemployment rates. UN suggested that by the end of 2011 world needed additional 48 million Jobs at least return to pre crisis level. Both developed and developing countries unemployment rates are higher than 2007, pre crisis area.

(The ICCO World Report, 2012)

But comparing to developed countries, developing countries’ progress towards employment was a success. Most Asian counties’ unemployment rates are coming back to below pre crisis standards. But apart from good recovery of unemployment, developing countries facing major problems such as underemployed workers who are poorly paid and having less securitized jobs. On the other hand unemployment rates of least developing countries remain the same. Another major concern is about higher youth unemployment rates all over the world. Again in developed countries having the higher youth unemployment rates comparing to developing countries. Inflation has increased worldwide dramatically since 2007, which pushed oil and food prices up along with a demand created. Inflation rates in developed countries have been increasing over past 3 years. (Mathew, S.2011)

2.3 Free Trade, Comparative advantage and the impact of the crisis on free trade Throughout last few centuries most of the economists implemented that free trade is the best way to trade. Free trade policies allow trading freely between nations, including goods, capital as well as labor forces. If one country is more efficient producing certain product than another country, then free trade will drive second country to purchase the good from first country which has more efficiency of producing the good. Economist during the past saw this as an advantage for both countries where one country can sell their surplus and other country can get the product for less than it would have cost them to make it themselves. This benefits the world economy as a whole because it causes production to come from the most efficient producer, maximizing world output. This can be defined at absolute advantage. But this absolute advantage can be find rarely over the world. What we can see around the world is comparative advantage. Comparative advantage means where one country has the ability to produce a certain good at a lower opportunity cost over another.

As an example, either cups or plates can be made from available plastic resources, and we choose to make Cups, then plates are our opportunity cost. If we choose to make plates, then Cups is. And if plates are worth more than Cups, then we incur a larger opportunity cost by making Cups. It follows that the smaller the opportunity cost we incur, the less opportunity we are wasting, so the better we are exploiting the opportunities we have. (World Economic Outlook Update, January 2010) There have been thousands of free trade agreements between countries in pre global financial crisis era. Globalization makes the world a small place so every country needed to trade with other countries and make their life easier. Import and exports rates had been improving rapidly for last couple of centuries. World trade organization and Doha development agenda brought new face to free trading, which carried out objectives of reducing trade barriers such as tax and tariffs to increase global trade.

Eventually Doha agenda’s negotiations fallen apart due to unaccepted agriculture rules. But as soon as Global Financial Crisis hit the world, it revealed that there are fundamental problems of free trade. Free trade can easily guide a country, which has unequal trade capacity and policies, to a huge surplus or deficits. Crisis indicates that free trade paradigm is dangerous. Where export strategies that lead to trade surpluses in one country result in trade deficits elsewhere. The crisis has also clearly proven that free trade combined with free movement of capital reinforces balance of payment, trade and economic imbalances, which was already recognized by Keynes. Since capital always flows where it gets most profits, it now flows to a few booming countries while other countries suffer from outflows and lack of productive credit. Currently, emerging countries are suffering from huge capital inflows because returns on investment in advanced countries are so low. (World Economic Outlook Update, 2012)

2.4 Protectionism
The word protectionism can be defined as actions and policies which a government takes in order to restrict or restrain international trade. Protectionism comes in to the system when government more concentrates on protecting its local businesses and jobs from foreign competitors. Methods of protectionism are import tariffs, quotas, subsidies or tax cuts to local businesses. In other words Trade protectionism is used by countries when they think their industries are being damaged by unfair competition by other countries. It is a defensive measure, and it is usually politically motivated. It can often work, in the short run. However, in the long run it usually does the opposite of its intentions. It can make the country, and the industries it is trying to protect, less competitive on the global marketplace. (Justin P. 2008)

2.5 Emerging Protectionism after global finance crisis
When the Global Financial Crisis hit world largely in 2008 whole world searching for alternatives. Economist starting to understand that free trade is not working properly anymore and comparative advantage is a long gone memory. As a result in 2009 World Trade Organization came up with new trade measures in 2009. This can be defined as the first step towards protectionism. But those new measures are somewhat mild. They only affected 1% of world trade in goods and hardly increased protectionism in trade in services. They mainly concentrated on textiles, clothing, footwear, iron, steel, and consumer electronics and agriculture. But then onward protectionism policies and measures increased remarkably. Global trade alert (GTA) announced that it has been at least 297 trade-discriminatory measures implemented in 2008 to mid 2009. G20 holds the biggest share of these new policies. Day by day trade-discriminatory measures on a rise and outnumbering trade-liberalizing measures. Trade remedies and tariffs took the higher portion of new measures by then.

Governments such as UK and US started to concentrate on more financial activities at home rather that going for cross border theory, which shrunk during the crisis. Banks were asked to lend home or lend local.

And there are some other non-tradition protectionism instruments after the GFC. Such as
* Industrial subsidies
* FDI restrictions
* Standards
* Restriction on migrant workers

Industrial subsidies mainly went to automobile industries in US and UK. In china subsidies have been splited and spread between several sectors. These subsidies and support has gone mainly to local industries, in order to ensure the protection of local market.

Buy national idea was implemented as a protectionism instrument right after global crisis. “buy Americas” and “buy Chinese” example for those campaigns.FDI restrictions or investment nationalism largely implemented on energy related sectors, especially in North America, Australia and European. Restriction on migrant workers policy also can see in both developed and developing countries. As an example US government restricted visas of foreign workers of bailed out banks.

Most important aspects which stand above all of these things are standards protectionism. Studies indicate that more restrictions have been on technical and food imports. Such as India tightened their standards on import of iron, aluminum etc. and china banned most of the imported agricultural products. Indonesia imposed pre-shipment inspection requirements on over 500 goods. (World Economic Situation and Prospects (WESP).2012)

(The Economic Time, 2012)

2.6 How big players Play with protectionism (summary)

* United States of America – since president bush era there was a trade protectionism mainly against china in US. But after the crisis hit and Obama’s administration took over protectionism policies started to increase. Even some economist started to rate president Obama as a greater protectionist. These protectionism policies not only against china but against most of the developing countries. Once Obama’s administration was criticized saying above mentioned protectionism policies badly affects on poor people not in developing countries but also in US. As an example in early 2009 US increased tariffs and import duties on cheap tires which are imported from china. In January 2012 Environmental Protection Agency (EPA) announced that palm oil, importing from south-east Asia countries, should not qualify for inclusion in federal renewable fuel standards. The ‘Buy American’ idea is another example for protectionism of US government. And also it seems like US giving really low priority towards trade policy, where they concentrate more on domestic priorities. Not trying to finish Doha round and not trying to go through already negotiated FTAs with countries like South Korea.

* Europe – latest economist’s researches show that Europe also currently in a defensive mode, as they always were. Europe trade policies also start to use protectionism against outsiders. According to the reports EU’s partnership agreements with Africa, Asia and Latin America also in a drift as well as already stuck FTA with South Korea. G20 report indicates that there have been 123 trade-restrictive measures have been introduced Between September 2011 and 1 May 2012.

* China – history shows that china is always been a protectionist. But when concentrating on post-crisis era, it’s pretty clear that Export restrictions, discriminatory national standards, FDI restrictions, and internet controls that discriminate against foreign technology companies, have all increased. Countries growth highly relying on domestic savings and productions.

* India – As all the above mentioned counties, India also has been increasing protectionism policies. But when comparing to other major countries India has increased protectionism not in a major way.

* Brazil – Brazil is a country which read the global financial crisis well and very low increscent in protectionism. But they have not increased further liberal trade policies.

* Russia – Russia has been increasing there protection largely since they were affected severely from the crisis.

(Eichengreen, B. and Irwin, D.2009)

2.7 Reversion to Protectionism on WTO’s and G20’s Perspectives

When it comes to WTO Doha round is yet to negotiate and completed. It seems like no major authorities really trying to come up with an alternatives or solutions. Case is exactly the same with G20 even though it makes more sense that G8, because of the wider participation. United states and china going on a defensive road while Europe hardly makes anything happen.

(World Economic Outlook Update, 2012)

3.0 Conclusion

Throughout this report we analyzed and studied about global financial crisis, how it affected on world trade, free trade and comparative advantage and emerging protectionism. Also we concentrated on how big players in global financial sector such as US, EU and China behave with the crisis. Will the global financial crisis (GFC) result in a higher level of free trade around the globe, or a reversion to protectionism? Currently it results in a reversion to protectionism because all the major countries using defensive methods.

4.0 Referencing

* World Economic Situation and Prospects (WESP).(2012). Retrieved 12.05.2012 from http://www.un.org/en/development/desa/policy/wesp/index.shtml

* IMF, World Economic Outlook Update, (January 2010). http://www.imf.org/external/pubs/ft/survey/so/2010/NEW012610B.htm

* UNCTAD, World Investment Report (2009). Transnational Corporations, Agricultural Production and Development . Geneva: United Nations, 2009.

* Erixon, F. (2009), Facing the Future: The Single Market for Services. Mimeo, September 2009.

* Demyanyk, Y. (2011), Understanding the Subprime Mortgage Crisis. Retrieved 12.06.2012 from http://rfs.oxfordjournals.org/content/24/6/1848.full

* Mathew, S.(2011) The Academic Analysis of the 2008 Financial Crisis: Round 1

* Eichengreen, B. and Irwin, D.(2009), “The Slide to Protectionism in the Great Depression: Who Succumbed and Why?”, NBER Working Papers, No 15142, National Bureau of Economic Research.

* Schularick, Moritz, and Alan M Taylor (2009). Credit Booms Gone Bust:
Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008. Working Paper, No. 15512. Cambridge, MA: National Bureau of Economic Research

* Ravenhill, John. (2011). Global Political Economy (3rd ed.). New York, Oxford University Press

* Justin P. (2008). International Business (4th ed). PHI Learning Pvt. Ltd

* IMF, World Economic Outlook Update, (2012). http://www.imf.org/external/pubs/ft/weo/2012/02/index.htm

* Benerji D, (2012) Protectionism on the rise: Economic slump leads to new trade walls in emerging nations, The Economic Times. http://articles.economictimes.indiatimes.com/2012-06-25/news/32408959_1_trade-curbs-g-20-national-manufacturing-policy