26 November 1998
WTO Secretariat releases 1998 annual report
Governments remain committed to open trade policies in wake of financial crisis: Trade growth outstrips gains in output
The multilateral trading system has stood up well so far to the economic pressures that began with the financial crisis in a number of East Asian countries in mid-1997. At the celebrations commemorating the 50th anniversary of the multilateral trading system, held in Geneva in May 1998, heads of state and government and ministers from across a wide spectrum of the WTO's membership reaffirmed their support for the system. This assessment is firmly underscored in the WTOs Annual Report for 1998, published today (3 December 1998).
Chapter I of the Report emphasizes that while the current difficulties facing the world economy clearly have their origins in the financial system, the trading system has an important role to play in helping to address these problems. The WTO provides a valuable bulwark against protectionist pressures emerging from significant changes in trade flows as a result of the crisis. It can also help to advance and anchor trade policy-related reforms in the affected economies. A notable and timely example was the successful completion in December 1997 of negotiations on further liberalization of trade in financial services. Seventy WTO Members representing 95 per cent of the global financial service market, including some of the East Asian economies most affected by the financial crisis, agreed to open their financial service sectors. The agreement deals with liberalisation of trade in banking, insurance and other financial services. The agreement does not cover liberalisation of the capital account of WTO Members
This message was further strengthened by the results of the second WTO Ministerial Conference, also held in Geneva in May. At that meeting, member governments firmly rejected protectionism, and took the necessary decisions to prepare the third WTO Ministerial Conference, to be held in the United States from 30 November 3 December 1999.
Chapter II of the Report reviews world trade in 1997 and the first half of 1998 in aggregate terms, as well as on a commodity and geographical basis. Detailed data on trade flows for 1997 are provided in the volume International Trade Statistics, which is issued at the same time as the Annual Report. More recent additional information on trade flows is also provided below. While real merchandise exports grew at the historically high level of 10 per cent in 1997, the growth rate for 1998 is expected to be less than half, at somewhere between 4 and 5 per cent. It may be noted that this rate is comparable to the annual average volume export growth rate in the years 1990-93. Trade growth continues to outpace overall economic growth, adding once again to the growing share of international trade in global economic activity. According to IMF estimates, world GDP growth was 4.1 per cent in 1997 and will be 2.0 per cent in 1998. The faster than expected slowdown in trade growth in 1998 is attributable primarily to economic developments in Asia. The East Asian financial crisis which began in the latter half of 1997, and the severity of the downturn in the Japanese economy in 1998, together with slower growth in the United Kingdom and Latin America led to reduced global economic activity. The downward tendency was somewhat mitigated, however, by increased momentum in continental Western Europe.
Developments in trade policy, addressed in Chapter III, underscore that despite increased difficulty for policy makers following the onset of the financial crisis and economic slowdown, the general drive toward multilateral, regional and unilateral market opening has continued in many countries. The report notes that there have been no fundamental reversals in the direction of trade policy, including in those countries most directly affected by the crisis. Nor is there any significant evidence of market-closing measures in the rest of the world, although there have been some increases in trade-defence measures in a few Members, with a view to forestalling increases in imports seen as unfair. Pressures in this direction may increase as exports from the countries most affected by the financial crisis pick up, and developments in this area will require careful monitoring. So far, export growth in value terms has been rather weak as volume increases were more than offset by price declines.
An examination of the process of globalization is featured in this years special topic, found in Chapter IV. The Report focuses on how trade liberalization has contributed to the process of globalization, and its impact vis-Ó-vis other factors that have been key to the process, such as technological developments and the internationalization of business activity. The basic case for open trade as a mechanism for increasing economic growth and promoting development is also examined. The report briefly discusses some of the main policy challenges confronting governments as they manage such matters as adjustment costs, distributional questions, marginalization, the environment, labour, sovereignty, and management of the financial system.
Recent developments in international trade flows
The sharper than projected deceleration of global output and trade in 1998, to about 4-5 per cent, is largely attributable to the underestimation of the recession in Japan and the deeper and more widespread repercussions of the financial crisis in East Asian countries. Growth projections made at the beginning of 1998 for the United States and Western Europe, however, are broadly accurate. Latin America's prospects have been revised downwards, mainly due to the slump in commodity prices and to some extent a more sombre appreciation by international capital markets of the region's near-term prospects, which led to sharply reduced net capital flows to the region since mid-year. Estimates of trade growth for 1998 remain more than usually tentative, and those for 1999 even less certain. Incomplete information for many countries, even in Western Europe, divergent regional growth rates, and the large price and exchange rate variations experienced in the course of the year give rise to unusually large error margins for trade growth estimates.
The slump in Asia's growth contributed significantly to depressed commodity markets, with oil prices and non-fuel commodity prices falling by about 30 per cent and 15 per cent respectively on an annual average basis. Although prices of manufactured goods have continued to decline in 1998, their decrease is considerably smaller than in the case of primary products. In 1997, prices of primary products decreased less than those of manufactures. This year will be the third in a row with a decrease in the dollar prices of internationally traded goods. Average prices for total merchandise exports are falling back to the level of 1991, the lowest in the 1990s.
Expectations regarding global trade growth in 1999 have been lowered in recent months. Most forecasters regard a moderate acceleration in volume growth compared to 1998 as the most likely scenario. In value terms, the recovery should be more pronounced as price declines for primary commodities are partly reversed and the dollar is not expected to strengthen. The actual outcome will depend in large measure on developments in international capital markets, the rate of recovery in Asia and in particular Japan, and the sustainability of growth momentum in Western Europe and North America. A sharp correction of the historically-high-priced stock markets in Western Europe and North America, combined with a markedly lower dollar vis-Ó-vis other main currencies, are two of the major downside risks in the current projections of trade volumes.
Trade developments in 1998 by region.
The value of Asia's imports and exports continued to shrink in the third quarter at a pace similar to that of the second quarter of 1998. Intra-Asian trade continues to be most affected, falling about one quarter below the corresponding level of the preceding year. In the first nine months, Asia's exports are down by about 7 per cent, while imports contracted by an even faster 16 per cent. Imports of the five Asian countries most affected by the financial crisis (Indonesia, Korea, Malaysia, Philippines and Thailand) fell by one-third, while their exports decreased by 3 per cent. There was no pick up in the dollar value of exports noticeable in the third quarter, but some stabilization in the slowdown of imports. Japan's exports are down by 8.5 per cent in the first nine months, while imports fell more than two times faster at 19 per cent, leading to a marked rise in Japan's trade surplus. Due to the yen's recent rise vis-Ó-vis the dollar, the full year annual declines of export and import values are likely to be somewhat smaller than for the first three quarters.
Latin America, which recorded the most dynamic trade performance of all regions last year and even at the beginning of 1998, has experienced a very sharp slowdown in the course of 1998. Exports expanded by more than 10 per cent in 1997, but fell below the level of the preceding year in the third quarter of 1998. The region's import growth, which exceeded 15 per cent in 1997 and was still close to 15 per cent in the first quarter of 1998, has slowed down to about 5 per cent in the third quarter of 1998. The deceleration of import growth was widely spread across the region with Brazil the region's largest economy and second largest importer - being most affected. Brazil's imports in the first nine months of 1998 fell by nearly 5 per cent, a dramatic turnaround from the 15 per cent increase in 1997.
North America's exports recorded a marked slowdown in 1998. Following an increase of nearly 10 per cent in 1997, price declines and the deceleration in volume growth led to a 5 per cent contraction of trade values in the third quarter of the current year. Import growth has also slowed down in the course of 1998, but far less than export growth. For the United States, data for the first 9 months indicate an import value growth rate of 4 per cent, while exports declined marginally. As U.S. import prices decreased by about 6 per cent and export prices by 3 per cent during that period, the difference between import and export growth is still larger in real terms (i.e. net of price changes) than in dollar value. With real import growth up close to 10 per cent more than twice the rate of global trade expansion and real export growth about 3 per cent higher than last year, the role of the United States in sustaining global trade expansion during the first nine months of 1998 has been very significant.
Western Europe's imports and exports measured in dollar terms rose both by about 2 per cent in the
first nine months this year, following a small decrease in 1997. EU exports to third countries slowed
down, while imports from third countries increased. EU imports rose by 5 per cent in the first half of 1998, while exports increased only 0.3 per cent. Consequently, the trade surplus of the EU with third countries was sharply reduced. Although EU intra-trade accelerated to about 3.5 per cent, its expansion remained below the rate of import growth from third countries. The stronger growth of Western Europe's trade values is largely due to exchange rate movements. The ECU depreciated vis-Ó-vis the US dollar by 10 per cent on average in 1997, but by only 3 per cent in the first nine months of 1998. As the ECU has strengthened considerably compared to the US dollar since August 1998, the annual average ECU/dollar rate might hardly change from the preceding year. This implies that the dollar value of Western Europe's trade in 1998 will not be depressed by exchange rate movements as was the case in 1997.
Africa and the Middle East are the two regions whose trade flows are most affected by the dramatic decline in commodity prices. In 1997, primary products accounted for two-thirds of Africa's and three quarters of the Middle East's merchandise exports. (Partner statistics available for the first three quarters can provide some indications of the 1998 developments: United States imports from OPEC countries and Japan's imports from the Middle East decreased by more than 30 per cent.) As indicated above, non-fuel commodity prices fell by 15 per cent on spot commodity markets, and crude petroleum by about 30 per cent. Both regions, which lagged behind in global trade growth throughout the 1990s up to 1997, are bound to fall further behind in 1998. This will be particularly true for those countries with low shares of manufactures in their total exports. Exporters of manufactures will be able to benefit from ongoing market expansion in North America and Western Europe in 1998.