The eyes of the world will be on the Group of Twenty (G-20) major nations, accounting for 90% of the world’s gross domestic product, 80% of its trade and two-thirds of its population, when they meet in London beginning April 2, 2009. They plan to discuss the cooperative steps necessary to bring the current economic crisis to a speedy end.

According to Arvind Panagariya in a Forbes article, they must Restore Credit And Resist Protectionism as a high priority.

He points out that:

The G20 recognize that international trade today accounts for a much larger proportion of the GDP than at the beginning of the Great Depression in virtually all nations. The likely damage to their economies from a trade war aimed at securing domestic markets exclusively for domestic producers is many times what it would have been in the 1930s. Unsurprisingly, despite shrinking demand across the board, no trade war has broken out and few observers suggest that it is likely to break out in the future.

Clearly international trade will only function if buyers and sellers can find the working capital to support the goods in process and in transit for such trade.

A key factor behind the spectacular decline in trade flows has been the breakdown of trade credit. Once a firm has an export order, it needs credit to finance the production and sale until it receives payment from the buyer. The bank that offers such credit may require the firm to obtain insurance cover for the loan in case of nonpayment. The importer faces the risk of nondelivery.

In all likelihood, the general breakdown of credit markets has asymmetrically impacted international trade transactions. With the exporter and importer located in two different countries, information asymmetries and the resulting distrust are deeper.

The likelihood of such concerted action seems high, given that in a statement at the end of a meeting in Horsham, England, today the G20 Finance officials have pledged to take ‘whatever action is necessary’ to revive economies.  They will maintain expansionary monetary policies as long as is needed.  In the statement, the leaders also called for stronger financial regulation, which seems most necessary given the banking debacles in the UK and the USA.

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