The IMF projects a decline in international trade of as much as 12 percent in 2009 in comparison to 6 percent fall in 2008. It all started with bursting of housing and asset markets bubble, which is not particularly related to international trade. However, with a financial crisis in the US, the world economy went in a downward spin, contracting global trade. Why would global trade, which has been growing on average 11 percent since 1957 as opposed to 4 percent growth of global output, collapse all of a sudden and inflict so much harm to major exporters? The ratio of fall in trade to fall in GDP has been 4:1 Economists and analysts hunt for the reasons (published in Spring 2009 edition of International Economy):
Barry Eichengreen, UC, Berkeley
He argues that we really don’t have an adequate understanding of the causes of collapse in world trade. However, few factors can be singled out.
- The most important one is the disruption in global supply chain, i.e. something like a domino effect in the form of decreasing demand for goods from one country leads to decline in exports of final goods from another and further decline in demand for intermediate goods from another country and so on. The growth of global supply chains has magnified the impact of declining final demand on trade.
- Another reason might be the disruptions to the supply of credit from international banks to some developing countries and industries.
Fred Bergsten, PIIE
He offers solutions rather than reasons for why trade declined more than GDP.
- There should be new protectionist measures (G20 needs to honor this pledge). Competitive currency devaluation should be avoided.
- Policy needs to correct large global trade and current account imbalances.
Gary Hufbauer, PIIE
Two reasons why developing world trade collapsed: prices and volume
- Commodity prices have been volatile instead of being a shock absorber.
- Exports volume is down because most of the developing countries export consumer goods, which has contracted severely due to global recession. He argues, “Any country that sees its exports drop less than 7 percent in 2009 can count itself lucky.”
Ronald McKinnon, Stanford University
- Intensive trading of manufactures went down as people cut back on purchase of durables.
- The credit crisis limited financing associated with international trade.
- Forward exchange transacting became more difficult and expensive because of disruption in the foreign and domestic interbank markets. Traders found it difficult to hedge themselves from currency fluctuations.
Jagdish Bhagwati, Columbia University
- He argues that drying up of financial credit is the main reason for decline in global trade. Btw, he refers to Naomi Klein as “a fount of many economic fallacies.”
Richard Erb, University of Montana
- The decline in tradeables generally decline more rapidly than the demand for services during a recession.
- The finanical crisis intensified this process.
Steve Hanke, Johns Hopkins University
- World trade is elastic with respect to global GDP. So, when global GDP slumps, we should expect an outsized plunge in world trade. And, the panic of 2008 has intensified this process.
Marina Whitman, University of Michigan
- It is because of a severe pull-back in financing added to—and interacting with—the global recession. Almost 90 percent of merchandise trade is dependent on trade finance.
- Intra-firm trade slows down more than GDP during financial crisis of this kind because this kind of trading activity is hinged on financing.
- Protectionist measures have so far had far less impact on the decline of trade than the other factors.
William Brock, Former US Trade Representative
- Recession led to less money available for investment, less capital to finance new technologies and greater production domestically, and less financing for exports or imports.
- He argues that a large part of the answer lies in the habit of making things worse (politically by engaging in protectionist measures) when times are tough.
Tadashi Nakamae, Nakamae International Economic Research
- There are multiple transactions involved in completion of a final good. When demand for that good falls, then the whole chain of transactions collapses, thus reducing world trade drastically. i.e. the fall in global trade is greater than the fall in global GDP.
- World trade is collapsing because American consumers are not spending, spreading large ripples across the globe.
Sylvia Ostry, University of Toronto
- We really don’t know what caused this because we have a new trading system and no data that tracks multiple trading of the same goods across borders.
- It also could be a widespread recession, a shortage of trade finance, and a rise in protectionism (although Bhagwati argues that there is no evidence that protectionist moves/threats so far have had any dent on trade flows).
Bernard Connolly, Connolly Global Macro Advisers
While there is no direct evidence that protectionist measures are the main cause, Conolloy argues that “protectionist measures, overt or covert, were one.”
- Reduced trade finance was another reason.
- Misallocation of resources and brining forward future spending.
Andrew Szamossezgi, Capital Trade
- Decline in manufacturing output has exceeded the decline in global GDP.
- Trade has suffered due to lowering of inventories and an effort to conserve cash.
- Disruption in global credit markets has restricted flows of credit needed to support trade.
- Commodity prices are falling and inventories of such items are piling up in ports.
Clayton Yeutter, Hogan & Hartson
- Decline in demand globally and businesses focusing more on domestic markets.
- Credit crunch hit trade financing.
- Risk, uncertainty and rising volatility (exchange rate) pulled back commerce.
- Protectionist measures in stimulus packages shrunk trade.
Norbert Walter, Deutsche Bank Group
- The current economic crisis is hitting countries all over at the same time, magnifying the decline in trade.
- Destocking of commodities, which were stocked heavily when prices went up in 2007 and 2008, created massive downturn in trade.
- The fall of Lehman Brothers brought money markets and the markets for short-term corporate credit to standstill.
Nicolas Veron, Bruegel
- Trade shock is a direct consequence of the events that wrecked the financial system because finance and trade are so deeply interdependent that it is impossible to consider one without the other.
William Caldwell, Advanced Cell Technology
- International production sharing or the internationalization of manufacturing supply chains is a major part of the story. When demand for a product shrinks, the multiple trade flows are terminated; not just the final trade flow.