WORLD TRADE
ORGANIZATIONWT/WGTDF/W/7
8 July 2002
(02-3768)
Working Group on Trade, Debt and Finance Original:  English
COMMUNICATION FROM THE OECD
The following communication, dated 2 July 2002, has been received from the OECD in
advance of their presentation to the Working Group on 11 July.
_______________
FINANCIAL CRISIS:  IMPLICATIONS FOR TRADE AND TRADE POLICY
1. What is the effect of financial crises on trade?  And what is the role of trade policy in
responding to such crises?
2. Work done at the OECD during the 1997 Asian financial crisis and subsequent studies enable
us to offer some answers to these questions.
3. In the early aftermath of the 1997 crisis, major movements in nominal exchange rates
throughout Asia led to significant changes in the patterns of competitiveness.  Depreciating currencies
in Asia raised relative import prices and enhanced the competitiveness of domestic producers.  At the
same time, lower spending by consumers and inve stors in the Asia region led to growing excess
capacity in many industries and downward pressure on prices, such that even though the volume of
exports increased, declining export prices led to reduced dollar export revenues.
4. The principal trade effects of the crisis were:
− massive import contraction in the ASEAN 4 (Indonesia, Malaysia, the Philippines and
Thailand) and Korea
− a delay in any export boom triggered by exchange rate depreciation
− a significant decline in intra-Asian trade and increased imports in regions outside Asia
5. The risk inherent in this situation was of a protectionist response:
− from the ASEAN 4 and Korea as they were in creasingly strained to service mounting
external debt
− from the United States, the EU and other countries facing a surge in imports from Asia
− and from other regions as they absorbed rising imports from the US and EU
6. The way in which that risk was averted offers important lessons about the appropriate
response of trade policy to financial crisis and, in particular, of the need to:WT/WGTDF/W/7
Page 2
(i) Keep markets open
− Turning inwards in the 1930s in response to that financial crisis helped push the world
economy into a sustained depression; we have learned from that experience that while
financial crises can be turned around fairly quickly, trade crises can have a prolonged and
damaging impact.
− After the 1997 crisis, because markets remained open – and because efforts were made,
including through the OECD, to sustain flows of trade finance – the crisis countries did
reap the benefits of an export-led recovery.
− The importance of trade finance is highlighted by the current situation in Argentina.  The
latest IMF "World Economic Outlook" notes that exports are likely to pick up in response
to the depreciation of the exchange rate but that in the short run much will depend on thestrengthening of trade financing.
(ii) Maintain regulatory reform and the liberalisation of financial services.
− In the case of Korea, in particular, recovery from the 1997 crisis was greatly aided by
financial sector reform and the liberalisation of financial services.
− Recent analysis at OECD (in "GATS: The Case for Open Services Markets") documents
experience in Chile and South Africa where financial services reform strengthenedresilience to external shocks.
− Other recent OECD work ("China in the World Economy: the Domestic Policy
Challenge") suggests that in China, wh ere the level of non-performing loans is
comparable to that in many South-East Asian countries after the 1997 crisis, the benefits
of WTO accession in raising Chinese industrial competitiveness will not be fully realised
without reform and opening up of the banking system.
(iii) Put trade policy within a broad reform agenda
− Trade policy alone is not a panacea.  Keeping markets open and encouraging the
liberalisation of trade and investment will only be fully effective if supported by broad-
based reform.
− This is a lesson we draw from another event in recent economic history – the Mexican
peso crisis of 1994.  Recovery from that crisis was facilitated by the fact that Mexico
implemented a comprehensive reform programme that addressed all the main elements
that had led to the crisis.
− Other recent work by OECD ("The Development Dimensions of Trade") suggests that
some of the key concomitants of liberal trade policy in response to an external shock are:
• regulatory reform, to foster efficiencies in areas like telecommunications and
transportation, essential for infrastructure development
• institutional mechanisms for dealing with conflict resolution – an unavoidable
element of external shocks, including financial crises, as changes in the domestic
terms of trade bring the risk of social conflict associated with shifts in income
distribution.
• sound macro-economic management to counter the effects of exchange rate
depreciation and the attendant upward pressure on domestic prices.WT/WGTDF/W/7
Page 3
• labour market flexibility, to enable the workforce to move from contracting industries
into export-oriented activities
• and – perhaps most importantly for developing countries – a key concomitant of
sound trade policy is effective trade-related technical assistance and capacity building
to enable the benefits of such a policy to be fully realised.
__________