World trade slowed sharply in the last months of 2008 and is projected to contract in 2009 for the first time since 1982. The food, fuel, and financial crises have hugely strained the world trading system, triggering protectionist responses, such as trade taxes, quotas, and even outright export bans in early 2008. The risk of protectionism intensifies as the financial crisis now affects the real economy.
At the G-20 London summit in early April 2009, leaders reaffirmed their commitment to refrain from protectionist measures. This G-20 commitment must be followed through with firm resolve. A similar commitment made in November 2008 was not adhered to by most G-20 members.
Successfully completing the Doha Round of trade negotiations would help keep markets open, ease protectionist pressures, strengthen the rules-based multilateral trading system, and provide a boost in confidence to the global economy.
Trade has been a powerful force in developing countries for growth, poverty reduction, and progress toward the MDGs. Maintaining and improving their access to international markets is a vital part of the development agenda. Aid for trade remains key for supporting developing countries, especially the poorest and least-developed countries, in their trade liberalization and trade facilitation efforts.
G-20 leaders recognized the importance of addressing the crunch in trade finance in an organized way. They agreed to ensure the availability of at least $250 billion of trade finance over the next two years through their export credit and investment agencies and through the multilateral development banks (MDBs).
International trade was significantly disturbed in 2007 and early 2008 because of surging food and mineral prices. A large number of developing countries that are net importers of food and/or fuel were severely affected by these high prices.
While food and fuel prices have declined from their mid-2008 peak, they are projected to remain well above their 1990s levels for many years.
The food prices crisis of 2008 was rooted in decades of trade-distorting policies that have encouraged inefficient agricultural production in rich countries and discouraged efficient production in developing countries. Agricultural trade restrictions and direct subsidies remain a major source of support for farmers in rich countries, who received $258 billion in 2007.
The credit crunch in rich countries fast spilled over to emerging markets and developing countries. Net flows of private capital to emerging markets are projected to decline sharply in 2009. Although poor countries are less financially integrated, they are being hurt by a lack of trade finance, a historic lifeline that they used to finance exports and imports.
Trade finance is critical to sustaining the multilateral trading system. Up to 20 percent of the $15.8 trillion world merchandise trade in 2008 involves secured documentary transactions, such as letters of credit.
Trade finance has tended to be highly vulnerable in times of crisis. For instance, trade finance to developing countries collapsed during the 1997-98 East Asian financial crisis.
In April 2009, G-20 leaders agreed to ensure $250 billion of support for trade finance aimed at avoiding major disruption in global trade.
Development institutions have acted to help ease access to trade finance. The IFC has, among other actions, doubled its Global Trade Finance Program to $3 billion to help facilitate trade. Its Global Trade Liquidity Program, with official and private partners is expected to finance up to $30 billion of trade over two years.
Trade policies that would help address the fundamental causes of the food crisis would involve correcting historical distortions in agricultural trade—disciplining export controls; reversing biofuel subsidies; lowering production subsidies; facilitating agricultural trade; investing in trade-related infrastructure; completing the Doha Round; and, eventually, further liberalizing world trade.
With Doha negotiations being slow, the surge in preferential trade agreements (PTAs) is reshaping the world trading architecture, and the trading environment for developing countries. While PTAs can promote development, they could pose serious challenges to a more open, transparent, and rules-based global trading system.
Trade policies (except for agriculture-related ones) are usually more restrictive in developing countries than in rich countries. The level of trade restrictiveness on average is higher for countries in South Asia and the Middle East and North Africa; and lower in East Asia and the Pacific, and Europe and Central Asia.
Developing countries can do a lot by way of trade facilitation to expand trade by reducing transaction costs for firms and farmers. High trade transaction costs and lack of capacity to move goods and services across borders prevent many countries from taking advantage of existing trade opportunities.
The World Bank, together with other partners, has launched the Trade Facilitation Facility in early 2009 aimed at helping developing countries improve their competitiveness by reducing the costs of engaging in international trade.
Aid for trade increased by about $2 billion in real terms during 2007, dominated by the European Communities ($2.8 billion) and its member states ($5.2 billion), the World Bank ($4.7 billion), the United States ($4.6 billion) and Japan ($4.4 billion). Aid for trade can result in indirect cross-border benefits to all trading partners. Donors should continue to fulfill their aid for trade commitments.
Iraq, India, Vietnam, Afghanistan and Ethiopia were the top five recipients in 2007, accounting for almost 30 percent of total aid for trade. Asian countries received almost half of the total ($10 billion on average during 2002-07), followed by Africa with 32 percent ($7.2 billion).
Development of economic infrastructure and productive capacity building dominated overall aid-for-trade volumes, at 54 percent and 43 percent, respectively, in 2007.