Trade and the G20 Agenda

Author: Richard Baldwin, Graduate Institute, Geneva

The G20 agenda seems oddly out of line with the way the global economic crisis is affecting most G20 members. At their November 2008 meeting, leaders thought of this as a financial crisis – and mostly confined to the G7 economies. The crisis was a landmine that the US and European economies had stepped on. As the landmine had been planted by US and European financial markets, the non-G7 members Brazil, India, China, South Africa and other emerging nations seemed only indirectly concerned.

In the past six months, the ‘landmine crisis’ has become a ‘cluster-bomb crisis’ – throwing recession-inducing projectiles in every direction. The Washington declaration matched G7 priorities in what was then mostly a G7 problem. Working with the declaration as a blueprint for the London Summit is no longer good enough. The emerging economies are now directly implicated; their economies are being damaged by a decade of G7 governance failures in financial markets. This changes the type of political guidance that is needed from the G20.

Specifically, trade is experiencing a sudden, severe and globally synchronised collapse. This freefall is one of the main channels through which the G7 recession is dragging down growth in other G20 nations.

It is true that G7 financial rescue and macro stimulus efforts must be the heart of the world’s crisis response, and financial regulatory reform is necessary to avoid future crises. But many G20 nations – perhaps a majority – are bystanders in discussions of massive stimulus packages and fundamental reform of the world’s most sophisticated financial practices. Trade, by contrast, concerns all G20 nations.

Our recent book concludes that protection is not yet a cause of trade’s plunge. It would, however, be irresponsible not to recognize that the mercantilist spectre is knocking at everybody’s door, that recession will embolden protectionist forces inside every G20 member. A perverse feedback between recession and protectionism is no longer an historical reminiscence of the 1930s but a possible scenario today. Hopefully it is a low probability scenario, but it is clearly one that G20 leaders could rule out with forceful action at the London Summit.

A protection-recession spiral is one of the few things that have not yet gone wrong in this crisis. The G20 should try, for once, to get out in front of the crisis and take concrete steps to ensure the spiral never gets started.

In our book, trade experts from around the world provide a list of such steps. These include a commitment to a more specific and broader standstill on new protection backed up by a real-time surveillance mechanism, a pre-commitment to negotiating the removal of all crisis-linked measures in three years’ time, and a head-of-state negotiation of a compromise that would get the Doha talks back on track. The boldest proposal, by former Mexican President Ernesto Zedillo, will not please diplomats as it suggests keeping the peace by preparing for war. He suggests that countries pledge to use whatever legal means they have at their disposal to retaliate against others for protectionist actions that harm their exports. ‘All you need,’ he writes, ‘is one major trade partner to commit to retaliation for others to follow suit … We need tough love, not sweet words in our present circumstances.’

Time is of the essence. A protectionist spiral in next nine months would be a tragedy – aborting any hope that the stimulus packages will work as well as killing any hopes that cooperation on the economic crisis can set the stage for cooperation on climate change.

This simple truth seems to have escaped the attention it deserves – perhaps because the G20 process is guided by Finance Ministries and Central Banks. Whatever the reason, it is odd that the emerging-economy members of the G20 have not insisted on a higher profile for trade issues that affect them much more immediately than agenda items such as financial reform or long drawn-out efforts to adjust ‘shares and chairs’ at the IMF, World Bank and other international financial institutions. It is time that emerging economy members of the G20 band together and demand that G20 action on trade should be at the top of the London Summit’s agenda.

Richard Baldwin is Professor of Economics at the Graduate Institute, Geneva, and Founder and Editor-in-Chief of CEPR’s Policy Portal This blog is based on the Vox Ebook he co-edited with Simon Evenett, ‘The collapse of global trade, murky protectionism and the crisis: Recommendations for the G20‘.