Ladies and Gentlemen,
The turbulence that we have seen in the financial system these past few weeks would make anyone's head spin! Back in 2004, a trader had recommended a book to me, entitled “Fooled by Randomness; The Hidden Role of Chance in Life and in the Markets”, which I simply couldn't help but re-read once again this week. Written by a seasoned banker and trader, who had seen just about everything there is to be seen in a market, in terms of rises and falls, Nassim Taleb came to the conclusion that the only viable explanation for market swings is absolute pure and utter “randomness”. Needless to say, his book spread like wildfire on Wall Street, giving comfort to all those whose predictions were falling on their heads.
In his famous “Table of Confusion”, Taleb argued that in the financial system we were all too quick to confuse luck for skills; randomness for determinism; probability for certainty; theory for reality; coincidence for causality; and forecasts for prophecy. And, in having witnessed the events of the past few weeks, who can blame him — quite frankly — for finding markets completely and utterly mind-boggling!
Just a few months ago, the world was talking about a food crisis. Incidentally, it was also talking about an oil crisis. A world in which food prices had risen, and would continue to rise, with a detrimental impact on the world's poor. We had seen bread riots in various parts of the world, serious rice shortages in others, and tens of thousands of demonstrators marching through Mexico's capital to protest against the rising price of tortillas. And yet, from September to October this year, we find that food prices have fallen by 20%! 10% below last year's prices. Who would have expected this sudden change? This sudden reversal of fortunes?
We have gone from a world whose newspaper headlines smacked of protests and warnings of impeding starvation to headlines announcing a potential commodity glut — and all within the span of just a few weeks. And the same story goes for many other commodities, not just food. Metals which have seen their prices tumble by 26%, also in a single month, and oil by 38%! There is no doubt that the world is traversing some very uncertain times, and that policy-makers are now faced with the formidable challenge of restoring order — or some “semblance” of order — to a world which seems to be largely governed by chaos.
In this chaos, we have seen international trade suffer a serious blow, one, incidentally, which we have yet to fully quantify; with ships leaving ports without cargo, and others anchoring-in, in anticipation of better times. We have seen the Baltic Dry Index — a benchmark for global freight cost — tumble to its lowest level in six years. It has fallen by 50% since the end of September amidst fears of weakening global demand, fears of an impending recession, and difficulty in obtaining trade finance. All this with an impact on the shipment of bulk commodities, such as iron ore, coal and grains. Amidst this turmoil, protectionist forces are rearing their heads, demanding governmental assistance, and demanding that domestic markets be shut to foreigners. In other words, we are hearing calls for less competition.
If this feels like a déjà-vu, well it is! Back in 1929, at the time of the Great Depression, we saw a similar story unfold. The infamous Smoot-Hawley Tariff Act of the 1930s - which I am sure you are all too familiar with - raised US tariffs on over 20,000 imported goods to record levels, spread through other nations which also took their own protectionist measures. A prelude to a war that impoverished the entire community of nations and which proved that beggar-thy-neighbour policies are nothing but a dead-end road.
Ladies and gentlemen, I would argue that amidst the chaos that we are witnessing today, what we need is greater regulation. What we need is better global governance. While there is no doubt that global financial regulation must be crafted, there is no doubt either that global trade regulation must be reinforced. What is desperately needed at a time like this is to restore trust in markets by reassuring investors that they are still operating within a rules-based international trade and financial system.
How do I situate the Multilateral Trading System in today's tumultuous times? The Multilateral Trading System is first and foremost an “insurance policy” against protectionism. By investing in the Multilateral Trading System, strengthening it and increasing its robustness, what the international community is in fact investing in is an insurance policy against the deterioration of market conditions. An insurance policy against our worst instincts; the instinct to shut-out the foreigner at a time of crisis, and build higher and higher tariff walls to hide our inefficiency.
But Nassim Taleb sums up human psychology quite well when he writes that: “As a derivatives trader I noticed that people do not like to insure against something abstract; the risk that merits their attention is always something vivid.”
Here is an example that proves precisely his point. In a survey of travellers at an airport, when travellers were asked which of the following two insurance policies they would be willing to pay more for — a policy that covered them against absolutely all travel risks, or one that simply covered them against the risk of a terrorist attack — the majority opted for the policy against the attack. And, this, despite the fact that the former would have covered them against ALL risks, including that of terrorism. A survey, needless to say, that has been studied by psychologists! As Taleb put it, the mental probabilistic map of man's brain is geared towards the sensational.
This I fear is the biggest problem facing the Multilateral Trading System right now. The risk of a return to protectionism is seeming to some to be “too abstract” and too remote to deal with. Human memory is short, and some have entirely forgotten the Great Depression; not least because most of us have not actually lived through it. But we must realize that as abstract as that risk may seem, it IS very real.
In the WTO, the Doha Round of trade negotiations promises to take this insurance policy further. Let me give you some ballpark figures for what is on the table in these negotiations - to make the case for it perfectly clear to you. In agricultural goods, the developing world's average tariff of 60% and the developed world's average tariff of 8% would fall by a quarter and by a half respectively (these are trade-weighted figures, I hasten to add). In industrial goods, the developing world's average tariff of 15% and the developed world's average tariff of 4% would both fall by 35% and 60% respectively. The developed world's harmful agricultural subsidies would also fall, with the worst kinds of subsidies being slashed by up to 80%.
Not to mention the trade opening that the Doha Round promises for services vital to commodity trading, such as transportation services, energy services and distribution services — to mention but a few. In a chapter of the negotiations known as “trade facilitation”, the Doha Round would also reduce the very harmful red tape — i.e. the bureaucratic customs procedures — that delay your cargo at ports, delay the clearance of your goods, and their delivery to the final consumer.
As an expansion of the world's insurance policy against protectionism, these are not insignificant gains. For a world whose poorest members are extremely dependent on the export of commodities, market access barriers and the unfair subsidies that are given by the rich must come down. Let us not forget that in Africa, 34 countries are today dependent on the export of less than three commodities. These three commodities account for more than 50% of their export. Worse, in 23 African countries, the export of only one commodity represents more than 50% of total exports. While such dependency calls for economic diversification, what it clearly also calls for is a reduction of all of the factors that may exacerbate price volatility — such as space for protectionism. This is what the Doha Round promises to do. It also promises to reduce the phenomenon of “tariff escalation” — i.e. of tariffs that rise with the level of processing, such as from cocoa to a chocolate bar. An issue vital for the industrial development of most of the world's poor, and which resonates across nearly all commodities.
On 12 November, I have convened the providers of trade finance to the WTO to discuss availability and affordability of finance for exports and imports and examine measures that should be considered to restore confidence in the market and in trade. This is in response to some of the concerns that WTO members have raised, particularly in developing countries, and to shipowners and traders suffering from the reluctance of banks to issue their letters of credit. I hope that this meeting will confirm that the effects of the banking crisis on trade finance will be short-lived and that in the meantime providers of trade finance are ready to take the necessary measures to address this issue, pending a quick return to normal credit conditions on world trade and commodity markets.
Ladies and gentlemen, to conclude, allow me to quote Taleb's work once again. He says that “one cannot judge a performance in any field by the results, but by the costs of the alternative (i.e. if history played out in a different way)”. And how right he is. The cost of failure of the Doha Round, the cost of failing to strengthen a global insurance policy against protectionism will be high. Let us not wait for history to teach us yet another lesson on the dangers of protectionism.
I thank you for your attention.
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