The Economist on the crisis/protectionism

EDITORIAL: "The G-20 summit: London calling; trade is collapsing and protectionism is on the rise. Time for the G20 to get going," The Economist, 28 March 2009.

BRIEFING: "Globalisation and trade: The nuts and bolts come apart; As global demand contracts, trade is slumping and protectionism rising," The Economist, 28 March 2009.

The WTO's predicted drop in global trade this year would be the worst since WWII (9%, compared to the WB's 6% prediction).

But here's why that number is a bit of a statistical inflation:

The collapse is partly due to globalisation. The days are gone when something was made in one country and exported. Products now contain parts from all over the world. Trade statistics look at value, not value-added, so they include a lot of double counting as parts move across borders and back. When the economy shrinks, trade will shrink faster.

A South Korean economist cited in the briefing refers to this phenom as "vertical specialization," as countries specialize not so much in final products "as in steps in the process of production."

Upside being that when growth resumes, trade will rebound faster than normal.

This is the answer I was missing when quizzed on this point by Hugh Hewitt recently. I gave the right answer (yes, the drop is highly tied to globalization's networked connectivity and thus it is likely to recover faster than expected), but this is a sharper expression of the same.

Still, as the Economist complains, such interdependency is a "thin reed" when it comes to preventing rising protectionism, and with enough of these somewhat hidden efforts, "global supply chains will break down."

And here comes the real warning: "If that happens, they will not be rebuilt for many years."

This message was part of the mag's admonitions to the G20 going in, a big one on the list being, finish the damn Doha round.

Protectionism is limited by loads of international agreements and the reality of global supply chains, but protectionism, the mag points out in the briefing, has gotten far more sophisticated (i.e., non-tariff) in recent years.

The best global antidote? Again, most experts cite restarting and finishing the Doha Round of the WTO, perhaps as a "crisis round" that elicits a cease-fire on subtle protectionist measures.