The World Trade Organization is forecasting a 9% drop in global trade this year as economies contract worldwide.

The collapse in global demand brought on by the biggest economic downturn in decades will drive exports down by roughly 9% in volume terms in 2009, WTO economists forecast today, noting that this represents the biggest such contraction since the Second World War. “Trade can be a potent tool in lifting the world from these economic doldrums. The contraction in developed countries is expected to be particularly severe with exports falling by 10% this year. In developing countries, which are far more dependent on trade for growth, exports will shrink by some 2%-3% in 2009, WTO economists say.

Economic contraction in most of the industrial world and steep export declines already posted in the early months of this year by most major economies — particularly those in Asia — makes for an unusually bleak 2009 trade assessment, said the WTO in its annual assessment of global trade.

It notes that signs of the sharp deterioration in trade were evident in the latter part of 2008 as demand sagged and production slowed. Although world trade grew by 2% in volume terms for the whole of 2008 it tapered off in the last six months and was well down on the 6% volume increase posted in 2007, it says.

A year ago the WTO predicted trade would grow 4.5% in 2008. “A large part of the explanation for the over-estimation was the unexpected and very sharp drop in global production in the fourth quarter of 2008,” it said.

The WTO suggested that real global output is likely to fall by between 1% and 2% in 2009. Although it pointed out that there is considerable uncertainty in all of these forecasts. Its’ trade growth forecast for 2009 assumes a normal pattern for a recession, where trade falls, remains weak for a time and then resumes its upward trajectory and begins to return to its previous trend.

“For the last 30 years trade has been an ever increasing part of economic activity, with trade growth often outpacing gains in output. Production for many products is sourced around the world so there is a multiplier effect — as demand falls sharply overall, trade will fall even further. The depleted pool of funds available for trade finance has contributed to the significant decline in trade flows, in particular in developing countries,” said WTO director-general Pascal Lamy.

Indeed, the WTO reports that trade growth data show declines that are larger than in past slow-downs, and it points to a number of possible reasons for this: the decline in demand is more widespread than in the past, as all regions of the world economy are slowing at once; the increasing presence of global supply chains in total trade; a shortage of trade finance; and the rise in protectionism.

Lamy also warned against protectionism as a policy response from national governments trying to defend local growth. He noted that many thousands of trade related jobs are being lost. “Governments must avoid making this bad situation worse by reverting to protectionist measures which in reality protect no nation and threaten the loss of more jobs,” Lamy said.

He added that the WTO is monitoring trade policy developments, and has observed that the use of protectionist measures is on the rise. “The risk is increasing of such measures choking off trade as an engine of recovery. We must be vigilant because we know that restricting imports only leads your trade partner to follow suit and hit your exports. Trade can be a potent tool in lifting the world from these economic doldrums. In London G20 leaders will have a unique opportunity to unite in moving from pledges to action and refrain from any further protectionist measure which will render global recovery efforts less effective,” Lamy said.

IE