Beggar-thy-neighbour? The global economic crisis, trade and protection
In: http://hdl.handle.net/1885/13870
At the heart of Australia's aid program is the objective 'to assist developing countries to reduce poverty and achieve sustainable development in line with Australia's national interest. A key aspect of this has been working towards attainment of the eight Millennium Development Goals (MDGs). The Global Economic Crisis {GEC) has had a severe impact on progress towards these goals and threatens to further sidetrack progress through an increase in protectionist pressures globally that, if succumbed to, could potentially stifle trade and economic activity globally. Over the past three decades global trade flows have increased dramatically, and have maintained a strong growth rate averaging a 5.5% over the period of 2000-07, outstripping the growth in world output over the same period of 3%. This trend is especially evident in the Asian region, where trade-led growth policies have resulted in the 'Asian miracle' that saw millions pulled out of poverty. There are three factors that characterise the trade flows of the developing Asian-Pacific economies. First, the developing nations of the Asia-Pacific region have collectively become increasingly .dependent on trade with the average trade to Gross Domestic Product ratio of the region increasing by over 23 percentage points between 1997 and 2007 to 98.7% Second, this increased dependence on trade has been accompanied by an increase in intraregional trade, which now represents half of all trade flows in the region. However, the region remains heavily connected to the developed markets of the European Union {EU), the United States of America {US) and Japan who together account for approximately 45% of the region's export markets. Finally, the composition of the region's exports has also changed, though this varies markedly between the sub-regions. As a general split, the Asian economies (bar South Asia) are becoming more reliant on Industry, particularly electronics and components, while the economies of the Pacific on the other hand tend to be heavily dependent on tourism and primary resource exports. South Asia has become increasingly dependent on its service exports, including tourism. The combination of these three factors has dictated how severely the GEC has thus far affected the region. Generally speaking the crisis represents the most severe economic slowdown since the Second World War, with all major economies to drop into recession with a predicted overall drop in global output of 1.3% Led by the region's increased dependence on trade and the associated reliance on the developed economies, the GEC has severely impacted the developing Asia-Pacific where an overall growth rate of 3.4% is predicted for 2009, the most sluggish growth in the region since the Asian Financial Crisis of 1997-88 . The impact has not been uniform across the regions,however, those regions more dependent on trade and most susceptible to a drop in demand from the developed economies are feeling the most acute effects. The composition of exports also played a part with the nations that are most dependent on electronics (the East and South East Asian economies) affected most by the collapse in demand resulting from the GEC. Commodity exports were the next hardest hit (South and South-East Asia and the Pacific), followed by exports of capital equipment (mostly the more developed nations of the region) and then garment exports. Economies where tourism represents a large share of GDP were also hit hard. These figures present the double-edged nature of using trade flows as an engine for growth - put simply, the more reliant on trade a region is the greater the impacts of the GEC. On the surface this may seem an argument against using trade as the primary engine of national growth. It is important, however, to recognise these effects in light of the benefits that have been gained by these nations to date as a result of their openness to trade. Nevertheless, the GEC has led to a rise in pressure from domestic workers and industry on governments for protection from external shocks. Protectionism offers a means by which governments can respond to such pressure. Protectionism is the policy of protecting the markets, industries or jobs of one's own country, usually by restricting the entry of products or services from other countries. It offers a means by which governments can assist such industries by inflating the demand for their products by reducing the foreign competition that faces the firm. In doing so, local employment levels can be maintained, appeasing domestic political pressures from these groups. However, there are three negative impacts for the implementing economy associated with protectionist policies. First, consumers will be forced to pay a higher price for goods, lowering their purchasing power and raising the cost of inputs for local producers. Second, such policies will prevent efficient restructure and reform occurring in the economy, which will raise unemployment and lead to an inefficient use of resources. Third, protectionist policies are likely to lead to retaliatory policies from other trading partners, meaning that other, perhaps more efficient sectors of the economy are hurt by efforts to protect another. Despite this there has been a notable rise in protectionist pressures globally, accompanied by a rise . in actual policies. By and large, though, governments are resisting calls for protection in light of the damaging effects it has on both the domestic and also global economy. Various studies forecast these effects, generally presenting similar findings that there is no economic incentive to pursue protectionist policies but, in some cases, significant political incentive. The impacts of the GEC will have potentially severe effects on progress towards the MDGs, which will only be intensified by a shift to protectionist pressures. Any shift to protectionism will have important implications for Australia's aid program. To address this threat AusAID can help on two levels. First, by helping developing nations resist protectionist policies and maximise the benefits of trade through a range of aid-for-trade policies. Second, the aid program can work to alleviate the potential impact of a shift to protectionism on three main levels: (1) generating employment and growth; (2) assisting developing governments in the provision of essential services; and (3) protecting the most vulnerable of these nations.