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Citi’s Buiter and Rahbari warn of international trade protectionism and repression

Citi’s chief economist Willem Buiter and global economist Ebrahim Rahbari warn the markets of financial and trade protectionism and “repression” but emphasise that emerging markets will create buoyancy for the world economy during the sovereign debt crisis.

International trade will boom over the next few decades as emerging market countries such as China and India overtake Europe and the US as the world’s largest trading hubs. However, distinguished macro-economist Willem Buiter warns Euromoney of the risks for international financial protectionism.

“Most emerging markets are used to various forms of financial repression,” says Buiter. “Even in the advanced economies, as more countries move towards more stringent forms of financial regulation, such regulation often takes on features of financial repression, permitting governments to stuff regulated entities with unwanted public debt at below-market rates.”

According to a report from Citi’s Global Perspectives & Solutions called ‘Trade transformed: The emerging new corridors of trade power’, world trade will rise from $37 trillion in 2010 to $122 trillion in 2030 and to $287 trillion in 2050. Asia could overtake western Europe as the world’s largest trading region by 2015, while China will overtake the US in 2015 and India overtake the US and Germany in trade by 2050.

Ebrahim Rahbari, economist for the global economics team at Citi, also warns of the risk to international trade from regulation.

“The biggest risk international trade faces is protectionism,” says Rahbari. “A common misperception is that emerging markets are less highly regulated than developed markets. In many areas, emerging markets are in fact much more highly regulated. A good example is the retail sector in India. On average, emerging markets also face much higher levels of trade barriers though, at least for tariffs, these have come down substantially over the past two decades. China is a very good example for the lowering of trade barriers, which has clearly played a big role in its impressive trade growth rate over this period.”

Meanwhile, in Europe, politicians are trying to save the euro by drafting a treaty. While fallout out of the sovereign debt crisis must have some impact on the emerging markets, Buiter emphasises how important those countries will be in buoying up the rest of the world.

“The sovereign debt crisis and deterioration of public finances in the majority of the advanced economies is unprecedented in peacetime; this will no doubt damage long-term growth prospects over the next decade,” says Buiter. “However, emerging economies have played a huge role in supporting the global economy; many of them now offer sufficient institutional quality and political stability to play a larger global role. Without them this crisis would have been indeed much worse.”

In tandem, the US and Europe are in the throes of one of the largest bouts of regulatory reform in recent history. While the new regulations are trying to create a more stable financial and banking system, experts have remarked to Euromoney that this could cause regulatory arbitrage, with market participants flocking to Asia because it is unlikely the region’s fragmented jurisdictions will adopt such stringent reforms.

“As we have seen with the Dodd-Frank Act, the implications of its extra-territorial jurisdiction reach are considerable,” says Buiter. “If China, let alone emerging Asia as a whole, decided to follow similar lines of regulatory reform, there would be a big impact on the rest of the world. However, emerging Asia and Asia overall is very fragmented in its approach to financial sector regulation, so it is unlikely that this would happen for the foreseeable future.”

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