Posted 09 October 2009 by Patrick Thomas
In recent weeks, there have been some signs that the sharp recession which has plagued the global economy is slowly beginning to turn a corner. This is welcome news. A good dose of economic growth is sorely needed at the moment; but looking forward, it’s clear that fundamental challenges remain. Last week, The Economist ran a cover story titled ‘After the Storm’, which cast a sober look at what could be the ‘new normal’ for the global economy:
The prospect of a ‘new normal’ … still spans at least two distinct possibilities. One is that the world economy returns roughly to its pre-crisis rate of growth, without regaining the ground lost. That, the IMF points out, is what happens after most financial crises. The second, more depressing possibility is that growth stays at a permanently lower rate, with investment, employment and productivity growth all feebler than before.
This is hardly encouraging stuff, and it made me wonder what we can expect from international trade in the future. Will trade and investment, the great engines of global economic growth, pick back up? Or are we looking at a ‘new normal’ of weaker commerce?
Here in the US, I have heard two very different scenarios. Earlier this week, Nobel Prize-winning trade economist Paul Krugman gave a talk to the World Business Forum. Mr. Krugman is bearish about the future of commerce. Referring to the trade collapse this year, he concluded:
When it comes to international trade, actually it’s not the Great Depression, it’s worse… World trade growth might not be as buoyant as it has been: this looks like a long siege for the world economy. When you recover from a crisis, you almost always rely on a large trade surplus. But the world as a whole can’t move into trade surplus, so this may be a really prolonged slump.
Fortunately, I have seen some more optimistic thinking as well. I attended a discussion at the World Bank a couple months ago, where Caroline Freund, Senior Economist in the Development Research Group at the World Bank, argued that the ratio between trade and global GDP has increased over time due to the increasing complexity of global supply chains. By this logic, just as trade has fallen fast, it should snap back quickly as global economic growth returns.
We don’t know which of these scenarios will come to pass, but it seems clear that things will not be the same post-crisis. For me, this is another reason to complete the Doha Round of trade negotiations as soon as possible. In the ‘new normal’, there will likely be fresh challenges for the multilateral trading system. Once we finally finish the Doha Round, which was launched back in 2001, the World Trade Organisation will be much better placed to tackle them.