In 2009, most of the principal developed countries are facing financial and economic challenges. This causes the largest decrease in global economic activities as various countries undertake varying measures to cushion their countries from the ongoing global financial crisis. Governments, especially from the developed countries are responding differently to the global economic crisis. Easing of fiscal and monetary policies has been the approach that is uniform among economies affected by the crises (Oldani, 2011). Such policies are contributing to a decrease in trade with other countries. The consequence of this is that there is an increase in incidences of unemployment. Global financial crises led risk reappraisal in business and households. Banks were also not willing to lend at flexible rates. This means a decrease in demand for imports leading loss of exports in other countries. Global Financial Crises impacted negatively on trade among nations.
Rise in financial and trade protectionism is a common feature during financial crises. The outcomes of the same do not meet the expectations, but the trend continues. During the Great Depression, this approach led to the worsening of matters. Protectionists indicate that this approach has the intentions of defending local jobs especially in the United States. The United States also did pass the Smoot-Hawley legislation during the crises that led to decreasing trade relations with other countries (Aldonas, 2009). At a G-20 meeting thereafter leaders undertook to promote trade and not put up barriers. Ironically, within two days Russia and India that were in attendance of the meeting passed Legislations that would hamper international trade. In the United States, there was a buy American campaign that was ongoing at the expense of imports from other countries. Global financial crises led to countries protecting their economies through protectionism.
Protectionism was a political problem that was affecting various countries. Another political issue that would affect trade was countries deciding to be free riders. That is any countries were facing financial and economic downpour making it irrelevant to devalue other economies. Global financial crisis led to a decreasing business confidence meaning there was neither borrowing nor investing. Economies had to rely on economic fiscal stimulus for the purposes of encouraging recovery (Oldani, 2011). Countries had the option of free riding countries that require large stimulus packages like the United States given that they will overflow to imports. This is the reason that countries such as America and China are encouraging their citizens to buy products from their home country. Global co-ordination of stimulus packages was the best option since protectionism led to a decrease in economic activities.
Rising in protectionism is a real threat to the world economy. Many countries facing the crises also have the problem of undercapitalized banks (OECD, 2010). These banks are not willing to lend a the normal rates and citizens in such countries are soaring reserves of the banks. To respond to this warring trend government and decision makers are directing banks to lend only to local citizens and businesses (OECD, 2010). Such policies, especially from the developed world, are causing an increasing in disparities return rates. International trade is suffering from such policies given that they are affecting global capital flows. Given that this practice was widespread, it is difficult to estimate the exact effects on global trade, but it is evident that it is immense. Protectionism is one of the major causes of decrease in international trade after global economic and financial crisis.
There is evidence that the policy by the United States to use protectionism led to decreasing trade relations among countries. This is because it in the long run leads to a decline in exports that could take years for recovery. Widespread protection measures led to fall of GDP between 1 to 6 % below the baseline for key economies (Oldani, 2011). As a consequence of this, exports will fall by a margin of between 6 to 27 percent below the baseline (Global Economic Crisis Resource Centre, 2009). This is a clear indication that trade and financial protectionism policies will is a long-term measure of decreasing export. Such policies can only encourage the redistribution of global trade at the initial stages that have little impact on the overall global trade. On the other hand, it has negative impacts on international trade for more than three years after the global financial crisis.
Increase of tariffs in another policy that United States used during the crisis. An increase in tariffs leads to raise the cost in an economy while at the same time decline demand for products. Trade partners of United States suffered rising of tariffs (Oldani, 2011). This is because it leads to a decrease in the demand for imported products hence income of trading partners decline. Decreasing income would mean they would not have the capability to purchase products from US and other countries. Declining trade among trading partners led to an increase in cases of unemployment both in America and its trading partners. This means that countries whose economies depend on trade with the US experienced a decrease in their GDP.
Canada was one of the trading partners of the United States that suffered due to the rising tariffs. In the United States, the effects of increasing tariffs led to a reduction in its own GDP to records of 1.28 below the baseline. Tariff increases alone led to 0.28 % decrease in United States GDP in the year 2011. Their northern border neighbor Canada suffered a 2.2 % decrease in its overall GDP. Studies indicate that tariffs rise in the United States contributed to 1.76 % of this decline (OECD, 2010). Small developing economies cannot gain from increasing tariffs so they rarely use such policies and for these reasons do not contribute to global trade stall. On the other hand, when large economies like the United States increase their tariffs such countries experience a decline in their GDP. On overall, the global economy suffers a reduction because of such policies.
Prior to the Global financial crisis, there was a trend towards the globalization of chains of production. Developed countries such as Japan and the US experience a decline in inventory cycles. Global financial crisis led to a decreasing inventory cycle especially in late 2008 and early 2009 (OECD, 2010). This had the meaning that there would be decreasing trade relations between nations for the next one year. During the period, OECD forecasts had indications that inventory cycle decrease was going to be a crucial indicator of the global economy over the next couple of year. Japan, China, and United States are states that have been suffering a decrease in inventory cycle (OECD, 2010). Economic downpour in these countries meant a deteriorating global trade given that they are substantial contributors to international activities.
OECD countries experienced an increasing stock-to-sales ratio. This was because of the drop in global sales with the advent of international crisis. Japan was the first country to experience this pattern, but there was replication of the same in other developing economies such as Australia and Korea (Scott, 2009). There was building up of stock among traders in Euro zone and Japan because of the drop is sales were a surprise to them. Increases in the ration of stock to sales in Japan and EU means that following years would experience sharp decreases in stock. Decreases in stock mean that international trade grows as was the case prior to the economic crisis (Nanto, 2009). Despite policies being significant contributors to decreasing global trade and financial activities, other aspects contributed by GFC accelerated the decline.
United States responded to the crisis using fiscal responses whose main aim was increasing demand within the local market and increasing the GDP. Decision makers succeeded in boasting local trade, but unknown to them there were other effects on the trade. Recovery from recession has the meaning that the government and the private sector will compete for scarce resources within the country. Fiscal policies are effective if a global recession persists for elongated period, which was not the case in 2009 leading to an increase in interest rates.
Investment reduced due to increasing interest rates and demands for durable goods shrank. United States exports fell as a consequence and according to studies will only recover after some years. In 2010, United States exports were 6 % below baseline, and it will take 4 years to recover. Many policies used by the United States and other developed countries worsened global financial crisis. Protectionism acts such as increases in tariffs and encouragement of local lending were retaliating and causing harm not only to the GDP of the country but also to the global trade. Studies indicate that, in events of global crisis, the best response is encouraging trade among countries. That is promoting international trade and having policies that promote the same would have positive impacts on the economy of a country. In accordance to this, government and other policy should use trade promoting policies in the face of declining global trade. Improving trade among nations will cushion countries from unemployment and a decrease in demand for commodities. Despite the fact that this might have negative impacts in the short term, it will lead to an increase in exports and incomes in the long term.
The Global financial crisis has considerable negative impacts on global financial flows and trade. Policy makers and the government from various countries responded to the crisis with stringent measures that discouraged international trade. There were short term benefits for such economies but in the long run this lead to a decrease in inventory cycle and exports. The United States for instance had a 6% decrease in exports because of its policy to increase tariffs. Protectionist measures did not affect the local economy alone, but it also had an impact on the trading partners of such countries. For countries like United States, raising tariffs affected Canada’s GDP. In accordance to this, GFC did affect international trade and policies used developed economies further accelerated global trade decline.
Oldani, C. 2011, Global Financial Crisis: Global Impact and Solutions, Sydney: Ashgate.
Nanto, K. 2009, Global Financial Crisis: Foreign and Trade Policy Effects, New York: DIANE Publishing.
Aldonas, D, 2009, Rethinking the Global Trading System: The Next Frontier, London: CSIS.
Global Economic Crisis Resource Centre, 2009, Global Economic Crisis: Impact on Business, California: Cengage Learning.
OECD, 2010, OECD Economic Outlook, New York: OECD Publishing.
Scott, H, 2009, The Global Financial Crisis, Northern Stratford: WEST PUB.