China’s large fiscal stimulus program appears to be starting to bolster imports from some of its neighbors

TO BE NOTED: From the NY Times:

"Trade Is Falling Fast Across the Globe

THE plunge in world economies that accelerated last fall is now reducing the volume of world trade at the fastest rate seen in decades. But February trade figures released this week by several countries provided tentative signs that the fall may be starting to slow.

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Multimedia

Graphic

World Trade Shrinks

The total value of exports shipped by 15 large exporters in February was nearly a third lower than in the same month of 2008 — a rate of fall much faster than anything seen in recent recessions.

“World trade is falling much faster now than in 1929-30,” two economists, Barry Eichengreen of the University of California and Kevin H. O’Rourke of Trinity College in Ireland, wrote in a paper released this week titled, “A Tale of Two Depressions.”

“That is highly alarming,” they added, “given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.”

As can be seen in the accompanying chart, the current decline came after a prolonged period of rapid growth. That growth was significantly fueled by the willingness of Americans to borrow and buy. Now, with credit harder to come by and unemployment rising, those consumers are cutting back.

Economists see some evidence of rising demand in China, however. While its overall imports continued to weaken last month, China’s large fiscal stimulus program appears to be starting to bolster imports from some of its neighbors. Its imports from Australia, the only country in the group not experiencing a substantial drop in exports, have soared.

“Korea and Taiwan also have rising exports to China,” Mr. Eichengreen said in an interview. “It does indicate there is at least one source of increased demand.”

China’s own exports, however, fell 41 percent during the month, the most of any of the countries shown.

In the United States, the February export figures showed a small increase from January, although they were 22 percent below the level of February 2008. That was the first month-over-month increase since July, when American exports, seasonally adjusted, peaked at $121.6 billion for the month. In February, the figure was $85.3 billion, a decline of 30 percent from the peak. Over that same period, China’s exports were down 47 percent.

The fact that trade is now falling at a faster rate than in the Great Depression does not mean the world is destined to repeat that experience, Mr. Eichengreen said. “The policy response now is very different,” he said, pointing to the fiscal stimulus plans enacted in many countries, including the United States. If that stimulus works, he said, the current decline in trade could eventually appear as “a blip” in a picture of increasing world trade.

The figures in the chart are in dollars, and are affected both by currency swings and by changing prices. With oil prices down sharply, the fall in exports from Mexico, for example, may be overstated.

But there is no doubt that world trade has been collapsing, along with industrial production in nearly every country. So far, the countries that have experienced the largest declines are the export-oriented economies of Asia, which had become extraordinarily dependent on continued sales to the United States.

Floyd Norris’s blog on finance and economics is at nytimes.com/norris."

"As it has become evident that the financial crisis is comparable, in important ways, to the early stages of the Great Depression,"

I'm not much interested in these lessons from the 30s discussions, but here's John Quiggin's take:

"As it has become evident that the financial crisis is comparable, in important ways, to the early stages of the Great Depression, there has been a lot of debate about the lessons to be learned from the responses to the Depression in the US, most notably the various policies that made up the New Deal. There’s a lot to be learned there, but it’s also important to remember that the Depression, in the US and elsewhere, continued throughout the 1930s before being brought to an abrupt end by the outbreak of World War II.[1]

Not only did the slump end when the war began, it did not return when the war ended - a huge difference from previous major wars.[2] Instead the three decades beginning in 1940 were a period of unparalleled prosperity for developed countries, with economic growth higher and unemployment lower than at any time before or since.

What lessons can we learn from this experience?

In the immediate aftermath of the war, the lesson seemed obvious. Planning had succeeded where capitalism had failed, and more planning was needed to maintain that success. As the White Paper on Full Employment (Commonwealth of Australia 1945) put it

Despite the need for more houses, food, equipment and every other type of product, before the war not all those available for work were able to find employment or to feel a sense of security in their future. On the average during the twenty years between 1919 and 1939 more than one-tenth of the men and women desiring work were unemployed. In the worst period of the depression well over 25 per cent were left in unproductive idleness. By contrast, during the war no financial or other obstacles have been allowed to prevent the need for extra production being satisfied to the limit of our resources.

Over time, as the difficulties of planning became apparent, emphasis shifted to the idea that the war had provided a Keynesian stimulus to aggregate demand, and that, with careful management, unemployment (or inflation) due to inadequate (excessive) aggregate demand could be avoided. Thirty years of success seemed to confirm that view.

After the failure of Keynesian economic management in the 1970s, this explanation appeared less adequate, but no adequate alternative was proposed. Given the apparent success of monetary policy in stabilising output and inflation, and reducing unemployment, from 1990 onwards, the issue seemed largely academic, and given the focus of US economists on the New Deal, even academic attention to the question has been limited.

Perhaps stimulatory fiscal policy will produce a rapid and complete recovery from the current crisis, and a restoration of the postwar Keynesian orthodoxy. But given the damage that has already been done to the global financial system, and the prospect of much more to come, this is far from certain. The experience of Japan in the 1990s is not encouraging, and this crisis is far worse in important respects. Perhaps when the collapse of financial intermediation is as near-complete as it was in the Depression, a large element of central direction is needed to restore trade and ensure necessary flows of credit. In the absence of a rapid recovery, questions like this will assume increased urgency over the next year or two."

I don't agree with him on various points, but here was my main response:

1. Don the libertarian Democrat Says:
   December 8th, 2008 at 3:17 am

   I’m on record favoring a very grand stimulus, tax cuts, and even printing money. I also love Keynes, but more for his writing style, which means a lot to me.

   Anyway, I feel differently about the knowledge we can gain from the 30s. Abstracting out the economic data can be of some slight use, but not much. The reason I believe this is that the decisions people made in the 30s were made in the context of the 30s, and that was a very different context than ours.

   I’ll give you one example. I once read a bunch of books by Wyndham Lewis. I don’t remember much about them, except that he seemed to truly believe that the only choice available was between Communism or Fascism. In other words, some form of Totalitarianism. This shocked me, but, after reading his books, I was surprised to find that many people writing in the 30s made that same assumption.

   Fortunately, there were wiser and better people around, millions and millions of them it turned out,including Keynes and Hayek, who understood the world better, and so we weren’t left with only those choices. But I continue to believe that the existential situation of the times people live in are more important than other people do. So that, the choices and decisions made in the 30s really can’t help us much.

   Instead, what’s happening is that we’re lurching and veering in a pragmatic way towards a path that leads us out of this mess. It turns out that we’re doing so in a way more reminiscent of Keynes, so, in order to feel like we really know what we’re doing, and since Keynes helped get us out of the 30s, we’re calling upon his spirit for solace and guidance.

   That’s fine with me because, as I’ve said, I love Keynes. But we’re going to get out of this mess in our own way and in our own time, and part of the process will be reading great books that help us get through these kind's of times. But there’s one thing that makes me more hopeful about this crisis, and, maybe I’m different than everybody else, but I really wouldn’t want to have been in the existential crisis of the 30s. I’ll take this one any day.

"Mr Crean noted the resolution of G20 leaders in Washington last week to push for a conclusion of the Doha round "

Here's good news if you're a free trader. From the FT:

"Australia to join transpacific free trade pact

By Naomi Mapstone in Lima

Published: November 19 2008 07:22 | Last updated: November 19 2008 07:22

Australia plans to join a regional trade pact that spans the Pacific Ocean.

Simon Crean, Australia’s trade minister, told the Financial Times that Australia would join Brunei Darussalam, Chile, New Zealand, Singapore and the US in the Trans Pacific Partnership, a “free trade” agreement.

Mr Crean said Peru was also likely to announce its decision to join TPP this week at the meeting of the 21 economies of the Asia Pacific Economic Co-operation group. Japan and Vietnam had also expressed interest.

The TPP was an important ”bridge” to creating a region of seamless trade and investment regimes across all of the Apec countries, Mr Crean said. ”If any country wants to secure its economic future, it’s got to engage in trade, and it’s got to find the means by which we continue to liberalise the basis upon which they can engage in trade,” he said."

This makes perfect sense.

"Such regional trade agreements are seen by critics as undermining global trade liberalisation but have flourished as the Doha world trade round talks have lost momentum."

The free trade movement has gone regional, but not stopped because of the problems with Doha. I 've already argued that completing Doha would be an important boost to the world economy in this crisis.

"Together the 21 Apec economies, which include the US, China, Russia and Mexico, account for about 55 per cent of the world’s GDP and about 50 per cent of world trade. Some within Apec fear a proliferation of bilateral agreements is proving unwieldy, however, and champion the formation of the free trade area for the Asia Pacific (FTAP)."

"The US, for example, has bilateral agreements with Singapore, Australia, Chile, Mexico, Canada, Korea and Peru, and is considering a deal with Colombia.

Juan F. Raffo, chair of Apec’s business advisory council, said a free trade area of the Asia Pacific was achievable within three years.

”It sounds like a little bit of a joke, but 420 is the number of bilateral FTAs you would need to have to have all the Apec countries integrated,” said Juan F. Raffo, chair of Apec’s business advisory council. ”… There’s no other way but to push for a more orderly agreement of trade between the Apec countries, in view let’s say of the constant slowness and failures of the Doha round.”

This complexity is a great argument for Doha. The push towards free trade will continue, with or without Doha, but it would be easier with it.

"Mr Crean noted the resolution of G20 leaders in Washington last week to push for a conclusion of the Doha round of global trade talks, saying it was ”one of the most important things trade ministers could do” to stimulate global economic activity.

”Here at Apec this week, nine of the G20 countries are participants. It is incumbent on us to find a strengthening of the resolve that was there last week to take the Doha round of world trade talks to a conclusion.”

Absolutely.

"``The Fed is making dollars available to the central banks of these countries who are trying to meet the needs of their banking systems.''

We've discussed Swap lines to various smaller countries from the Fed in discussing:

Soros:
2) Swap lines from big countries to small countries ( Fine )

Sachs:
1) Big national banks extend swap lines to smaller country national banks. ( Fine ) See Brad Setser here.

From Bloomberg:

"Fed Opens Swaps With South Korea, Brazil, Mexico, Singapore

By Steve Matthews and William Sim

Oct. 30 (Bloomberg) -- The Federal Reserve agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations for the first time.

The Fed set up ``liquidity swap facilities with the central banks of these four large systemically important economies'' effective until April 30, the central bank said yesterday in a statement. The arrangements aim ``to mitigate the spread of difficulties in obtaining U.S. dollar funding.''

Fed Chairman Ben S. Bernanke is trying to prevent the global credit crisis from upending the financial markets and economies of developing countries, where currencies have plunged and government bond premiums have soared. The Fed yesterday cut its benchmark interest rate, followed by Hong Kong and Taiwan today."

Read the whole post.

I agree with this:

``We can't leave these other important countries out in the cold,'' said Edwin Truman, a senior fellow at the Peterson Institute for International Economics in Washington and former chief of the Fed's international-finance division. ``A global recession is being caused by the effects of seizing up of the financial system around the world.''

Countries listed:
South Korea
Brazil
Mexico
Singapore
New Zealand
Australia
Central European Bank

and a few others.

Also, Brad Setser:

"Today the Federal Reserve indicated that it would swap US dollars for Brazilian real, Korean won, Mexican pesos and Singapore dollars — effectively allowing a select group of emerging economies to borrow dollars on terms similar to those available to the G-10 economies. Or almost similar terms. The G-10 central banks can currently borrow dollars from the Fed without limit; the four selected emerging market central banks can only borrow $30 billion each. But $120 billion is real money — and if need be, the the size of these swap lines conceivably could be increased.

This move goes some way toward breaking down the line between the G-7 (really G-10) economies and emerging economies that emerged after the G-7 countries guaranteed that systemically important financial institutions in their economies wouldn’t be allowed to fail and the Fed expanded the scale of the swap lines available to European economies whose banks had a large need for dollars. "