Effects of the Economic Crisis on Free Trade

The global financial crisis has impacted economies around the world.
The global financial crisis has impacted economies around the world. (Image: chart image by Kit Wai Chan from Fotolia.com)

The global economic crisis of 2008 began with the collapse of the U.S. mortgage market and quickly spread around the world, affecting the economies of other nations and impacting all aspects of the international economy, including global trade. Since the 1990s, multilateral trade agreements and organizations such as the World Trade Organization have accelerated growth in free trade, enabling goods and services to cross borders more freely than in the past. The global financial crunch, however, impacted this global marketplace in several significant ways.

Decline in Trade

The most obvious effect of the international economic crisis has been a reduction in overall trade activity among nations. The Federal Reserve Bank of Dallas reported in 2009 that international trade declined nearly 12 percent that year. For leading economic powers such as the United States, exports declined by 13.6 percent, while developing nations experienced a smaller decline of about seven percent, the Dallas Fed reported.

Limited Trade Finance

Trade finance, according to the Dallas Federal Reserve bank, includes loans and insurance policies tied to international transactions, including credit given by exporters and guarantees given by export credit agencies. The global financial crisis, however, reduced the market for trade finance, making it more difficult to obtain credit for global transactions. The International Centre for Trade and Sustainable Development (ICTSD) reported in 2008 that the lack of affordable trade finance especially affects developing nations, which rely on such financing to fully participate in the global economy. Without access to affordable financing, international trade is less able to absorb the effects of a global recession, according to ICTSD.

Declining Export Revenues

A reduction in overall trade activity means nations export fewer goods. The Congressional Research Service (CRS), in a report on the global economic crisis and its effects, wrote that exports help nations obtain the foreign funds needed to buy imports and pay foreign debt. A decline in export revenues reduces the value of a country's currency, which raises interest rates for households, companies and government entities, according to CRS.

Rising Protectionism

An increase in free trade reduces protectionist policies, such as tariffs and quotas, designed to make foreign goods more expensive and thus, less attractive to domestic consumers. Decreases in trade have the opposite effect, however, and result in increased protectionism. The Congressional Research Service reported that the international financial crisis triggered new protectionist measures. Citing World Trade Organization figures, CRS stated that India, China, the European Union, Russia and others enacted new restrictions on trade in the wake of the financial problems that gripped the world in 2008.

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