Introduction
There has been considerable dynamism in global trade patterns and areas in of development of trade in which countries invest worldwide. The most recent remarkable changes occurred during the financial crisis that has dominated the better part of the second half of this decade (Whelan 3). Exporters have thus been trying to look for means of escaping the harsh effects of the crisis by the use of a variety of strategies that have seen a major shift of trade patterns.
Although the cause of the financial crisis that occurred across the world is not known for sure, global trade patterns also had its part to play as one of the causes of the financial crisis. This issue is faced with a considerable controversy but a deeper look into the economic standings of a variety of economies before and during the financial crisis has a myriad of revelations.
The financial crisis
It is common knowledge that the world is currently recovering from a major financial crisis that began after the middle of this decade. This crisis was remarkably different from the normal cyclical downs due to the fact that prices and outputs fell all over the world (Bernanke 3). Such a situation had not happened in close to eight decades since the last Keynesian mode, which could be compared with the stated financial crisis, happened in the 1930’s.
However, there is an identifiable difference between the counter-measures applied in the 1930’s and those applied during the last four-or-so years. While countries raised tariffs in the 1930’s and consequently reduced trade, the recent financial crisis was characterized by a decline in trading activities brought about by a substantial decrease in world production. This crisis has had a number of other effects.
Effect of the crisis on global trade patterns
The stated global financial crisis has had tremendous effects on global trade patterns. The economic struggles that economies have gone through while trying to mitigate the effects of the crisis has been very instrumental in changing the aforementioned trade patterns.
Some of the effects that this crisis has brought to the preexistent trading patterns include the beefing up of intra-regional trade which has become increasingly popular since the start of the financial crisis (Bank for International Settlements 10). This has, in turn led to growth of regional hubs, some of which have taken the global trade arena by storm. Examples of these hubs include China, South Africa, Brazil and India with the last hub growing fast to become the Asian secondary hub.
The above stated strengthening of trade within regions has led to some kind of specialization. Each of the major trade regions of the world seemed to concentrate more on a given branch of trade and give their outputs to the rest of the world.
This has led to perfection of services and the trading expertise of nations hence the booming of the aforementioned regional hubs (Buiter 12). It has enhanced the preexistent scope of international trade opening better opportunities for countries that lacked the same. This kind of what can be termed as regional trade specialization is evident from the fact that most of Asia’s inputs in the global trade are due to its characteristic manufacturing capability.
On the other hand, America has grown to be very good in agriculture and it is currently operating a commendable portion of the total agricultural exchanges in the global market. Finally, Africa has, kind of, specialized in the production of supportive resources and it is bringing to the global market a variety of resources needed by a variety of industries to perform their functions.
The global crisis has also made developing countries give the best input to global trade. This is because, after the start of the recession, its effects were transmitted throughout the world by global trade with the most affected being the key players during the time (developed countries).
This led to some kind of disconnection between developing and developed countries making the developing countries experience less severe effects of the crisis. This explains why a double dip recession has fewer effects on developing countries and adversely affects developed countries. Let us now have a look at how the crisis affected the strategic positioning of some economies (Buiter 21).
India was experiencing a boom in engineering just before the financial crisis began. In the year 2005, an approximate 28% of its total manufacture exports were composed of engineering goods. To explain the reason for this trend, Indian impact of global trade on employment is determined by the elasticity of textile and engineering.
With the financial crisis, it beginning during this time, India had to invest more on engineering employment whose elasticity to trade is considerably lower in comparison to that of the textile industry (Whelan 9). There were also numerous cases of informalisation of employment due to the unpredictability of the economic situation. The geographical composition of Indian trade was also not spared.
During the financial crisis, Indian exports conformed to the prevailing global trends whereby Indian exports to western countries (developed) fell by an approximate 7 percent. Those to the developing countries rose by an approximate 10 percent with the greatest growth achieved for exports to Africa (Bernanke 11). Despite the stated rise of exports to developing countries, by the year 2009, India was still behind China, the regional hub of Asia.
At the onset o the global financial crisis, China was adversely affected with a huge drop in its GDP growth. The good thing about the Chinese government is that it took swift actions to change the situation. This was through the introduction of an expansionary fiscal policy with the pumping of a stimulus package of an approximate Rmb4 trillion into the Chinese economy.
The aforementioned policy would indubitably achieve the success it did due to the fact that China’s fiscal position is very good. This is because of the guarantee of success with increased government spending in China (Bernanke 7). Thus as long as the government can afford and as long as it is willing, it has the option of increasing its expenditure to get out of a depression.
Despite the discussed effects of the financial crisis on the Chinese economy, China has been in a different economic and financial level during the crisis as compared to Europe and the United States.
The country revolutionized its banking system by introduction of large capital and subsequent writing off of loans that were not sufficiently performing. While other systems were jeopardized during the recession, China’s banking system was virtually unaffected with an absence of common problems like a fall in monetary multiplier, liquidity shortages and occurrence of credit crunches.
Although the Chinese economy seems to have been a success during the recession, the international community has been increasingly worried that the Chinese economy could be very unstable due to its main focus on monetary policies (Buiter 22). This has made a number of investors and trade partners avoid alliance with China.
Global trade imbalances and the financial crisis
The severe global crisis that is yet to bottom out spilled from the monetary sector to the actual economy, including worldwide business in manufactures, goods and services. The commencement of the current crunch can be traced back to July 2007 with the liquidity crisis due to the loss of assurance in the mortgage credit markets in the United States of America.
It was not clear at first whether the crisis could spread over to other economies (Paulson 36). The major concern was for the developing countries, whether and how they could isolate themselves from the problems originating in their largest market.
There was optimism that the problem could be restricted to monetary markets, with little effect on the actual and the rest of the world. Nonetheless, this expectation was crushed in September 2008 as the crisis got to an acute stage, with very pronounced downhill fluctuations in the stock markets, significantly reduced economic escalation rates, unpredictable exchange rates and squeezes in commodity and services demand.
This led to reductions in industrial production and decreasing movements of global trade, and impacts on interrelated sectors such as transfer of expertise. The crunch was also accompanied by a rise in unemployment, with affiliated waning earnings and demand (Paulson 37).
Due to globalization, the instant the financial crunch hit the actual economy and resulted into a worldwide economic crisis, it was swiftly transmitted to many developing nations by way of reduction in trade funding and a reduction in demand affecting mutual trade movements. These effects were mostly experienced in fields dealing in global production and supply networks. Decline in demand for commodities from developing countries by the developed country markets had an adverse impact on the developing nations.
What are considered to have made the situation worse are the pronounced global trade imbalances and the absence of a strong international monetary system. A critical look at the crisis which first began in the first world economies begins by recalling the end of the worldwide system of Bretton Woods which had enabled two decades of somewhat steady global affluence and financial steadiness.
From then it has become possible to recognize an Anglo-Saxon part of the world financial system on the one hand, where economic guiding principle(s) since the commencement of the 1980s was rather successful in enhancing expansion and job creations, and a Euro-Japanese component, where growth remained slow and economic principles wavered with no defined or steady view on the way to use the greater fiscal self-sufficiency that the end of the global monetary system had made achievable (Snape 14).
The Anglo-Saxon logic at the time was for entities to take a full swing in the direction of unrestrained flow of funds and unlimited freedom to use any opportunity to achieve immediate gains. Consequently, the crisis has brought to the fore the impact of short-term aims on long-term development.
This reasoning, however, has proved to be the main driving force of the global financial system in the last three decades. Minus the towering levels of consumption in the United States, currently most of the first world and many upcoming market economies would have much lower living standards with higher unemployment rates (Bank for International Settlements 18).
Without a doubt, the high consumption levels in the United States since the beginning of the 1990s was not well financed from actual home sources. To a large extent, it was enhanced by the speculative rumors that exaggerated housing and stock markets. Growth of the actual economy and declining trends in personal income distribution led to borrowing and consumption much beyond the actual incomes in the United States and the United Kingdom due to increasing costs for housing and stocks.
End-user demand in both countries increased rapidly while at the same time family savings rates got to as low as close to zero. Thereby, the growth process got progressively frailer since it meant that many families could only manage to uphold their level of consumption by much more borrowing.
The comings into place of open markets and rising worldwide competition in the marketplace for commodities and services, the huge expenditure ultimately encouraged borrowing on global marketplaces and resulted in large current account deficits.
Some other economies of the first world were vigilant at the time against current account deficits and overspending (Bart 28). Japan, Germany and neighboring countries of the latter applied practices that brought nearly stagnant earnings and a considerable decrease in consumption levels.
However, since this strategy position also meant improved cost competitiveness, it resulted in too much export escalation and ever-increasing surpluses in current accounts, in that way piling up huge net asset positions in relation to the overspending countries. In both these cases global competitiveness was in addition tuned by passing exchange rate depreciations brought about by speculative monetary flows triggered by interest rate differentials (Bart 29).
These international imbalances played the role of rapidly extending the financial crisis that had its origin in the United States to several other nations. This was mainly due to the fact that current-account inequalities are replicated by capital account inequalities: the country with a current-account excess has to credit the disparity between its export returns and its import expenses to deficit countries.
Monetary losses in the arrears countries or the incapability to repay debts then directly feed back to the surplus countries and consequently put at risk their monetary system. This way of spreading the effect possesses an even greater power due to lack of control in monetary relations between countries in trade in the globalized economy.
Another significant cause of growing imbalances was movements of comparative prices in trade commodities as a result of speculation in monetary marketplaces. Ever-growing detachment of the dynamics of exchange rates with their basics, majorly the inflation differential between countries, led to extensive and pronounced movements in the general level of economies in relation to others (Paulson 39). These alterations in the actual exchange rates are without a doubt associated with increasing worldwide inequalities.
Speculation in money markets due to interest rate differentials have resulted in particular way of overspending that is now slowing down. Other economies like Iceland, East Europe, Australia, etc loaned foreign currencies that had considerably low rates of interest. With incoming funds after high outcomes, currencies of capital-importing economies grew in ostensible and actual terms with this leading to a decline of these economies’ competitiveness.
Losses of marketplace shares and increasing current account deficits led to unstable external positions for these economies. The onset of the international crisis set off the turn down of these hypothetical stances, led to a loss in value of the monies initially targeted by carry trade and forced firms and private households in the affected regions to default.
This poses a mainly foreign straight risk to the banks and other financial institutions in these economies (Paulson 41). A case to illustrate this is what came out between the East European debtors and their lenders from Austria. To add to all these, skyrocketing of goods prices ended up in the coming up of mostly very large current account surpluses in commodity exporting nations over the past five years.
However, when the rectification came, the position of several commodity producers in the smaller upcoming economies speedily took a nosedive. Other than a reduction in export earnings, this rectification devalues asset investment and infrastructure that was directly brought about by high demand and rapidly growing earnings of the last years.
The crisis grew amidst the overlook of international community – it failed to give the globalized marketplace viable international regulations. The abrupt downturn of speculative stances in the different sectors of the monetary market was set off by changes of the house costs in the United States.
The sudden change in prices was a consequence of the deregulation monetary markets on the international scale, mainly endorsed by nations around the world (Paulson 41). The spreading of risk and its severing and the knowledge on it was promoted by ensuring security through methodologies like residential mortgage-backed securities that looked to gratify the hunger of investors for bigger profits.
Minus the financial technique of deregulation in the presence of suitable laws, prospects on gins of purely monetary tools in the double-digit range would actually not have been possible. In fact, in actual economies with single-digit growth rates those prospects are mistaken from the beginning. Nonetheless, humanity has a tendency of assuming that in their lifetime events may take place that never took place before and thus temporarily ignore lessons they are supposed to have drawn from past events.
This happened in the not-long ago stock marketplace booms of the new millennium. In spite of the dot.com crash of 2000, a wide range of investors got to make investments in hedge funds and inventive monetary tools. These monies required that they ever increase their risk exposure for the sake of better gains with more complicated computer models looking for the best bets which in fact added to the ambiguity of many tools (Snape 20).
It ought to have been clear from the onset that all could not be standard and that the ability of the actual marketplace to cope with inflated real estate and commodity costs or skewed exchange rates is sternly restricted, however it is only now, by the occurrence of the crisis, that this is getting to be understood by many players and strategists.
An even further important pusher of this form of financial invention was the inexperienced notion that effective marketplace theorems that did not identify intent uncertainty but erroneously assumed well informed buyers and sellers and thus promised reduced risk.
Due to the invisibility to many of these complicated bundled commodities and services, a large number of investments got their way into tools classified as low risk. A globalized clientele made investments in these bonds for the reason that the international inequalities had intensified the international monetary relations and had created the need for monetary institutions located in the economies with current account surpluses to hold much of the toxic paper (Buiter 28).
Initial money diversification was viewed by many as diversification of risks. Nevertheless, the opposite took place – financial invention ended up in a concentration of risk since most of the tools were secured by using investments that held similar default risks.
The credit-rating bodies completely failed. It was mainly due to the microeconomic advance they normally take and their ignorance regarding macroeconomic and general issues on an international scale that they failed to understand the risk of so many players on the same frail link between the small actual marketplace and a bloated monetary sector.
Relatively low interest rates globally during the crisis has driven investors to hunt for higher yields and relative stability in monetary marketplaces reflecting the low cost of funds and solid economic growth leading to considerable under pricing of risk. This has weakened lending standards and increased leverage.
The increase in leverage sharpened the exposure to liquidity risk for monetary institutions as they relied progressively more on wholesale marketplaces for financing and these funds became increasingly short term (Bernanke 6). New and complicated monetary products led to speculation on related risks and made a contribution to mispricing on unimaginable levels. This led to failure on the risk controls with various fraud cases bringing about considerable losses.
Significant changes have taken place since the year 2007 leading to imbalances in the savings and investment sectors in major economies. In the United States for instance, state-run savings declined as the financial position shifted from a surplus to a considerable deficit and as household savings fell, leading to a dramatic increase in the current account deficit.
The decrease in household savings partly reflected considerably low interest rates and increased accessibility of funding interrelated to shelter that brought about a boom in consumption and housing investment.
Growth enhanced by consumption in the United States fostered economic recovery in Japan and Europe on the back of higher exports. Specifically in Europe, corporate profits went up. However, problems in the framework of these economies and especially rigidities in commodity and labor markets restricted investment opportunities (Paulson 44). The combination of high business savings and slow-moving investment led to increasing nationalized savings and outside surpluses.
Imbalances in savings and investments and current account surpluses of growing economies also grew sharply. In emerging economies in Eastern Asia, savings went up.
The increases in the external surpluses of these economies reflected a decrease in relation to GNP in investment and particularly the extremes in such investments that took place in the upsurge to the meltdown (Paulson 44). Surpluses form outside reflected strategy decisions in many of these economies to reconstruct official coffers which had been decimated during the financial crisis.
The years after 2008 showed a dramatic increase in the savings and investment inequalities in China. In spite of a strong investment performance, China’s savings went up in a dramatic manner. Government savings improved and business savings recorded a steep rise. Generally in Eastern Asia, outside surpluses put upward pressure on exchange rates (Bernanke, 18). However, this demand was mitigated by extensive untainted money intercession and thus delaying regulation.
After mid-2008, current account surpluses of oil-exporting economies of Middle East began to rise as pronounced worldwide demand concern about the reliability and security of oil supply pushed prices higher.
The substantive profits by oil producers were in large net monetary outflows which found their way to the United States. With the anticipated level of savings in the world getting over and above the desired investment at the interest rates existing at the time, the excess of world savings pushed down actual rates of interest and started a boom in commodity prices (Bernanke 18).
The series began to provide for itself at this juncture. With an increased accessibility to credit and lower interest rates, United States households utilized borrowed funds to maintain their consumption and stimulate a home development boom. Ever-growing United States demand fuelled additional growth in the rest of the world, being an addition to current account surpluses. This was especially in Eastern Asia upcoming economies.
Among these economies, China’s current account surplus shot through the roof and official reserves went up by record levels. Cutthroat pressures originating from China also put pressure on other East Asian economies to restrict the growth of their currencies against the U.S. dollar, promoting outside surpluses and preserve amassing in these economies (Snape 24).
The current account surpluses of oil-producing and exporting economies in the Middle East also went up due to rising global demand continued to drive up oil prices. Consequently, by way of net cash flows, upcoming economies’ outside surpluses were channeled back to the United States. This funding then assisted finance a continuation of the consumption and real estate boom and a steady rise in commodity costs.
To a considerable extent, the strong liking for United States dollar commodities that came out reflected the crucial role that the dollar plays as a set aside currency in the global monetary system.
As a result, the United States was in a position to fund its increasing outside deficits rather without difficulty and holdup required adjustments in domestic savings and in its equilibrium of expenditure, reflecting the first attribute of the global monetary system. However, there was also a net movement of private capital into the United States (Whelan 11).
This reflected the idea that United States markets were better synchronized, had better control, and were more protected than marketplaces in upcoming countries. What is more, in the early 2009 economic growth was faster in the United States and gains on monetary investments were seen to be higher than in other developed economies. As a result, a self-strengthening effect set in. As cash inflows to the United States promoted investment prices and gains, additional flows of capital were stimulated.
Few analysts question the being in place of the inequalities or their contribution to investment cost inflation. However, with the benefit of hindsight, many commentators have argued that the United States should have used monetary strategy(s) to dull the effects of cash inflows, thereby forestalling the crisis.
It is said that the Federal Reserve allowed free monetary conditions to exist for too long, permitting the upsurge of too much liquidity in the monetary system. The Fed is a suitable scapegoat, but what these commentaries put forward is that it could have used financial strategy alone to deal with international inequalities. They fall short of realizing that financial strategy is a blunt gadget (Bank for International Settlements 22).
During the crisis period, an observation has come out that the problem of global trade imbalances would reduce over time as expansion in the rest of the world, particularly in Europe and Eastern Asia, was seen to disengage from expansion in the United States.
In concurrence, it was also argued that other economies, especially China, were stepping up to become engines to maintain international growth. It was therefore argued that world inequalities could be self-rectifying and that there was time for more steady alterations in economic strategies in the major economies (Bank of International Settlements 22).
The slump in the United States has had a harsher than expected impact on the rest of the globe has brought to the fore these propositions as myths, and dashed hopes that a lasting rectification in global imbalances could be attained without a severe disruption in world growth.
Now there is an apparent requirement for strategy measures to deal with the problem, and global inequalities should no longer be thought as a medium-term issue that can be dealt with progressively. The disengagement and new engines of growth mythologies grew up from an unsophisticated examination of state-run financial records.
The data for Europe and Eastern Asia economies indicated that home demand and not net exports was progressively more the main supplier to economic growth, consequently the observation that development in these economies had disengaged from growth elsewhere (Bart 31).
The new growth engines allegory was derived from an analysis of world GDP information, which clearly showed that other economies’ contributions to world GDP growth were increasing in relation to the contribution of the United States. Undeniably, China’s contribution to world growth exceeded that of the United States in 2007.
The fundamental problem with the investigation underlying the disengagement myth was that it paid attention exclusively on the adjoining sources of growth (Bart 31). No effort was made to try to determine whether home requirements growth was self-sustaining or whether it was generated as the multiplier result arising from the returns resulting from exports.
Likewise, in the new engines of growth myth, the implication that China was turning into a growth engine for the global economy did not factor in whether China was in reality generating demand for the rest of the world. China was indeed, to some level, doing so for the rest of Asia.
On the other hand, the engine at the end of the day driving China’s import demand was China’s exports (Snape 25). That the two propositions were in the end just myths became really clear as the United States fell into recession. The financial slump may have been additional to the hold up in the rest of the economies, but it is the loss of spur derived from United States demand that has been the main issue in pulling down economic growth, particularly in Eastern Asia.
In one general view, present-day economic problems make it hard in the near term to deal with global inequalities, due to concerns about downbeat short-run effects on growth and employment. But ignoring inequalities and getting back to previous strategies to stimulate growth will serve only to worsen the imbalances when the global economy gets back on its feet, making them an even greater problem and creating an economic environment that eventually may be unstable (Bank for International Settlements 23).
The challenge for heads of state is to come up with strategies and policies that both pad the economic slump in the short-term and deal with global imbalances at a rational tempo.
Conclusion
If humanity seeks to keep similar crises at bay in the future, it will have to reckon with global trade imbalances and the factors in the global financial organization that stimulated their growth. If nothing is done, the imbalances will simply build up again as the global marketplace recovers, and in time they will end up being a major causal factor to the next global crisis. In the end it must be acknowledged that solutions lie not with any worldwide gathering but with governments.
The international system has made it possible for governments to build up huge balance of payments inequalities; the international system will continue to allow them to do so. But the past year or so of crisis brings out the difference between doing what may be politically practical and doing what is financially viable. If country establishments do not learn their lessons from the present-day economic and financial crisis, they will without a doubt find themselves reliving it.
Works Cited
Bank for International Settlements, ‘‘Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity, 2007.’’
Bernanke, Ben. ‘‘Monetary Policy and the Housing Bubble.’’ Speech at the Annual Meeting of the American Economic Association, Atlanta, GA, 3 January 2010.
Bernanke, Ben. “The Global Saving Glut and the U.S. Current Account Deficit,” Sandridge Lecture, Virginia Association of Economics, Richmond, VA, 10 March 2005.
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Paulson, Junior. “Remarks on Financial Rescue Package and Economic Update.’’ US Department of the Treasury, Washington, DC, 12 November 2008.
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Van Ark, Bart, “Europe’s Productivity Gap: Catchers Up or Getting Stuck?” unpublished paper, University of Groningen, 2006.
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