Stalled trade, Japan/China row, harm world economy: OECD

The world economy is at its most fragile since the 2008-09 financial crisis, with recovery impeded by stalling global trade growth and a bitter territorial row between China and Japan, OECD Secretary General Angel Gurria told Reuters on Thursday.

Reviving global trade was vital to engineering a rebound in economic growth, and failing to deliver that raised the risk of a burst of protectionist policies, said Gurria, who heads the Paris-based policy laboratory for the world's top economies.

"Trade had the potential of getting us out of the hole. It looked good, it was gathering speed after a drop in 2009 and now again it is ebbing, it's stalling," Gurria said. "That is affecting our capacity for the relaunch, for the recovery."

So too is a row between Beijing and Tokyo over disputed islands in the South China Sea. China's Commerce Ministry said on Wednesday the dispute had hurt trade ties and demanded that Japan take responsibility for the consequences.

"The timing doesn't seem to be stellar," Gurria said. "This hurts confidence at a moment when confidence is perhaps the great missing link here... it comes at the moment when everybody was focused on how we get out of the hole."

China and Japan are the world's biggest economies after the United States, and two-way trade between them grew 14.3 percent in 2011 to a record $345 billion. Nissan Motor Co. has already said the row is having some impact on car sales.

Trade stalls, growth falls

The latest OECD data shows merchandise trade slowed in most major economies of the world in the second quarter of 2012, with outright contractions in all major European countries and India, Russia and South Africa - key emerging "BRICS" economies.

That follows numbers from the International Monetary Fund (IMF), crunched with a three-month lag, that show trade growth had ground to a halt in the first four months of the year.

A 40-year long correlation between trade and economic growth signals a slowdown in world trade will be accompanied by a fresh lurch lower for global output.

The OECD earlier this month slashed its growth forecasts for the Group of Seven (G7) most developed economies, putting the blame squarely on the shoulders of the euro zone.

Three years of a festering debt crisis have dragged one of the world's biggest economic blocs back to the brink of recession, sapping growth from its major trading partners in the process.

Europe's problems have resonated particularly in China.

The European Union is the biggest customer for the country's vast factory sector, where some 200 million jobs are estimated to be supported by worldwide exports - worth 31.4 percent of China's $7.3 trillion economic output in 2011, according to World Bank data.

China's Commerce Ministry said on Wednesday the export outlook was grim and demand may be weaker in the months ahead than it has been so far this year.

A survey of purchasing managers in China's manufacturing industry, published by HSBC and data firm Markit on Thursday, signalled factory output dipped to its lowest level in 10 months in September, although there were signs of stability emerging in export orders and overall activity.

Gurria welcomed efforts by Beijing to fight a slowdown that has seeped into China's domestic economy from the external sector, but cautioned investors against expectations of a splurge like 2008's 4 trillion yuan package.

Protectionist threat

He also cautioned global governments against using protectionist policies to bolster domestic growth in the short term as that would undermine decades of wealth creation fostered through the World Trade Organisation and its predecessors.

"Trade doesn't happen by itself. Trade is inspired and promoted by companies in countries with certain policies," said Gurria, who was in Beijing to talk about trade issues.

"What was created in decades can very easily be dismantled by short-sighted protectionist policies. We have to fight protectionism with everything we've got."

To that end, Gurria said a joint effort by the OECD, WTO and the United Nations' trade body, UNCTAD, to recalculate global trade in terms of value created at each stage of the production process as opposed to final sales terms, should help to defuse trade tensions when the data is published in December.

"We will make a very decisive change in the way we look at trade and in the way the benefits of trade and investment flows accumulate in different countries. We believe this is going to remove the edge on the protectionist tendencies that there are today," Gurria said.

"For example between the United States and China, we are going to be able to present a new logic, a new way of appraising the benefits. We will see, we know, that mostly it is going to be knowledge that drives the benefit of international trade, rather than where you are producing the bits and pieces."