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Trade and Economic Effects of Responses to the Economic Crisis

image of Trade and Economic Effects of Responses to the Economic Crisis

The dramatic collapse in world trade in 2009 is, this report shows, mainly due to: the drop in demand for highly traded products; the drying up of trade finance; and the vertically integrated nature of global supply chains. Contrary to expectations, protectionist measures were relatively muted and did not play a significant part. In fact, because of their sheer size, stimulus measures may have had more impact on trade than direct trade policy measures Nevertheless, dollar for dollar, direct trade restricting measures have the most strongly negative impacts on growth and employment: a one dollar increase in tariff revenues results in a USD 2.16 drop in world exports and a USD 0.73 drop in world income. 

The analyses presented here suggest that exit strategies from measures to deal with the crisis will be most effective in boosting growth and jobs if they first roll back measures that discriminate between domestic and foreign firms and those that target specific sectors. General demand stimulus measures and active labour market policies are preferable under current conditions. 

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The Trade and Economic Effects of Crisis Response Measures

Which measures taken in response to the crisis bring most benefits both to the country implementing the policy and to the world? This question is addressed in this chapter using numerical simulations of the broad range of policy measures taken in response to the crisis. The analysis concentrates on behind-the-border measures but also looks into direct trade policy instruments, although these have not been major elements in the policy response. The analysis unambiguously shows that import protection is particularly unproductive and can be detrimental to the fragile economic recovery. Demand stimulus measures generally perform better than supply side measures, but sector specific measures, or measures favouring domestic products are inferior to more generic measures. Sector-specific supply side measures are overwhelmingly negative for partner countries who might find themselves entangled in a mutual subsidy spiral. They are also very difficult to unwind because of the rents they create.

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