WTO plays down disaster impact on global trade

EXIM MATTERS

Natural disasters "� floods in Gujarat, Maharashtra and Andhra Pradesh "� and terrorist attacks "� foiled and expected "� dominated the headlines last week. How do such natural disasters and terrorist attacks or threats affect international trade and economic growth?

A recent report from economists of the World Trade Organisation (WTO) says while human suffering and localised damage can be considerable and immediate effect on particular industries notable due to natural disasters, the economy-wide impact these events have on trade and growth is short-term and generally minimal.

To buttress its premise, the WTO's 2006 World Trade Report points out that tsunami badly affected India, Indonesia, Thailand, Maldives and Sri Lanka but merchandise trade grew at double digit in four of these countries, the sole exception being Maldives, the smallest of the affected countries.

Even the effects on tourism in Thailand and Maldives were minimal. Similarly, the Katrina and Rita hurricanes in the United States did not have discernible effect on either the US growth rates or the US petroleum imports, observes the report.

So the impact of natural disasters on international trade flows depends on how large the tradable sector is in the devastated areas and how integrated it is with the global economy. At the national level, exports may fall, important inputs may be in short supply, major utilities may be disrupted or there could be transportation bottlenecks. However, the overall impact on international trade will be temporary and localised, says the WTO report.

On terrorist risks, the report says they increase the transaction costs of international trade mainly via higher insurance premiums and tightened security measures at the borders, ports and airports. Ongoing concerns about international terrorism have also led to longer delivery times of traded commodities and additional security specific costs, especially in the airlines industry and maritime transport. However, international co-operation to ensure security has intensified and numerous initiatives taken, observes the report.

According to one study, value shares of transport and insurance costs may range from 1 per cent for pharmaceuticals to more than 23 per cent for crude fertilisers. The export of services, such as on-site development of software, may become more difficult, due to actual or perceived difficulties in obtaining visas.

The overall impact of a given increase in transaction costs on a country's trade depends, however, on its trade openness, its principal trading partners, the composition of its traded goods and services and their respective modes of delivery.

In conclusion, the report says terrorists acts tend to affect particular industries especially tourism, but the effect is generally localised and temporary. The report notes that trade costs may result as a result of concerns about terrorism but many governments are taking measures to mitigate this effect. The report also deals extensively on the issue of trade distorting effect of subsidies. It says government subsidies can be useful instruments in correcting market failures and working towards social objectives but can also distort trade and provoke strong responses from trading partners.

So a week of bad news, including reports that the US Congress might review the Generalised System of Preferences to India's disadvantage, need not necessarily dampen business optimism. Perhaps, that explains why the stock markets did not go down after receiving the news of natural disasters.

email: tncr@sify.com