As I noted the other day off-handedly, when we think of economic globalization, we tend to think of the two pillars of international finance and international trade. At LSE, we generally studied them as related, but distinct phenomena. Let’s put it this way: you know how you can get through English 101 by chanting “four legs good, two legs bad?” You can get through grad school by repeating ad nauseam the mantra “trade flows good, portfolio capital flows bad.”I keed, I keed. But seriously, most academic economists acknowledge that trade is an all-around beneficial economic driver, whereas the record of finance (capital flows) is a bit more mixed.
Which is why I was so surprised to read about an unexpected knock-on effect of frozen global credit markets: the cost of financing international shipments has skyrocketed. In a nutshell: nobody wants to lend money to exporters to cover up-front shipping costs, even though the ships and cargo are put up as collateral (maybe lenders are afraid of pirates?) Unfortunately, in the real world, trade and finance are not quite the neat, separate spheres we study in the classroom.
This is a sobering development, one which has flown under the radar given the other enormous, paradigm-shifting developments that have occurred in these strange times. (Partial nationalization?!? Really??) But it is an indicator of just how bad things have gotten, and it gives a glimpse of how difficult it might become for the world economy to function, should these government-led rescue initiatives fail. A world where finance problems strangles trade is enough to send shivers down my spine.
(Photo by akpt)
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