Global trade is slowing

Global trade is slowing

Global trade is slowing

The Japanese export market did not survive the economic crisis without harm. In the previous years, Japan could always rely on increasing demand for its export from developing and emerging countries, but the drop in exports of 7,7 % in Ocotober has shown that emerging-economy demand for its goods has also been hit. Japan is only an example of a rich country which is affected by slowing trade. Germany which is known for its high-quality exports has also experienced a heavy decline. Since high-quality goods have high elastic demand, the demand for these goods decreases massively when there is an economic crisis. Poor countries, however, who normally produce cheap quality goods are better off at the moment, because the goods tend to be necessities that people still buy in bad times. Poor countries are facing the problem that they are lacking trade credit for finance due to the global shortage in liquidity caused by the financial crisis. Now, export credit agencies and the World Bank try to restore the liquidity in the market by providing more money.

Squeezing the accelerator

Due to economic recession, hedge funds believed that the car company VW would also have problems selling its cars. That's why they thought VW shares were highly overvalued and would soon be falling. So, hedge funds lended 12 % of the VW shares from investors and did something called a short selling. However, hedge funds hadn't taken into account that the biggest VW investor, Porsche, had a cash-settled call option to increase its present shares at VW from 35 % to 74 %. So when Porsche announced that it wants to increase its shares at VW, this caused an explosion of the share value of VW. Thus in order to minimize losses, hedge funds had to quickly buy VW shares at a much higher value at which they had lended them. This again caused the value of VW shares to rocket. Early estimates suggested that the hedge funds' losses could be as much as $ 30 billion.

One world

One world

Due to globalization,national companies have become more integrated in the gloabl economy. The positive side of globalization is that it has the potential to increase productivity and living standards everywhere. However, critics of globalization predict that increasing competition from low-wage developing countries will destroy jobs and push down wages in rich economies. Even 50 years before World War 1, there was a period of globalization which was driven by reductions in trade barriers and a sharp fall in transport costs. This previous trend of globalization ended with Worl War 1, which was the cause for trade protectionism and tight restricitons on capital movement. After World War 2, big economic powers realized that it was important to reduce trade barriers in order to recover. They set up an arrangement on tariffs and trade, called the Bretton Woods system. In the 1970s the Bretton Woods system collapsed which led to the rebirth of the global free market in which goods and money were floating. The two factors, an improvement in technology and liberalization, were responsible for the increased flows of money and goods. Methods used to measure the degree of product- market integration have shown that many countries openness to trade hasn't changed a lot since 1913 and that prices converge across countries which is due to the persistence of import barriers. Product markets are not even close to being integrated across borders as within a nation and even the financial markets are not fully integrated yet. While product and capital markets have become increasingly integrated, labour markets have not, since labour is less mobile than it was in the second half of the 19th century. These facts don't conclude that globalization is not happening. As opposed to the pre 1914 globalization period where large parts of the world didn't participate in the world economy, more economies than ever are taking part in the globalization process today. In the future, new technology will encourage further integration and make it even harder for protectionist governments to block trade. In addition, organizations like the World Trade Organization give stability to free trade. All that awards globalization a good foundation to be more durable than it was before World War 1.

The Doha Dilemma

Doha Dilemma

May 29th 2008

What is to blame for the global food crisis? Is it government intervention in agriculture or free farm trade that is responsible for the current price spikes on food, which primarily affect the poor? Even though critics of a free farm trade think that only the government can guarantee food security and stop the unfair situation of the poor people, whose businesses are disadvantaged by rich world's subsidies, free farm trade doesn't necessarily preclude these points and furthermore it has shown that free farm trade alleviates poverty in most of the cases.
The argument of food security can be countered at the example of North Korea. In this country, people experience an increase in food prices, since trade barriers prevent the export of food especially rice. Thus, the global supply of rice is disrupted and farmers cease producing rice which makes rice scarce and therefore the price of rice goes up.
A study executed by scientists of the world bank have shown that free farm trade would reduce poverty in most of the cases. On the other hand, another study has shown that due to free farm trade, staple foods will get more expensive (slash of subsidies) and thus increase poverty. However, this study has only taken staple food into consideration as opposed to the other one, which focused on all farm goods. And that's why the effect of expensive staple food can be outweighed by the increased demand for farm exports as the rich countries cut the tariffs.
So in conclusion, these two studies suggest that the nature of trade reform matters, since it would be more sensible to fight poverty by cutting tariffs than slashing rich world's subsidies. It can be said that free farm trade is not a cause for the global food crisis, however the crisis has shown that it is important to establish the right reforms.