Thursday, May 27, 2010

In search of the smoking gun for trade collapse

One of the most striking aspects of the recent recession is the collapse in international trade. This paper uses disaggregated data on U.S. imports and exports to shed light on the anatomy of this collapse. We find that the recent reduction in trade relative to overall economic activity is far larger than in previous downturns. Information on quantities and prices of both domestic absorption and imports reveals a 40% shortfall in imports, relative to what would be predicted by a simple import demand relationship. In a sample of imports and exports disaggregated at the 6-digit NAICS level, we find that sectors used as intermediate inputs experienced significantly higher percentage reductions in both imports and exports. We also find support for compositional effects: sectors with larger reductions in domestic output had larger drops in trade. By contrast, we find no support for the hypothesis that trade credit played a role in the recent trade collapse.

See this paper looking for the smoking gun on the great trade collapse of this decade. Also see this blog for what economists think caused trade to decline more rapidly than the decline in GDP. This paper counter’s Barry Eichengreen’s point that disruptions to the supply of credit from international banks to some developing countries might have been the reason. Another reason economists point out is the disruption in the trade of intermediate goods. The degree of trade of intermediate goods is so high that disruption in one process has a domino effect on others, thus causing a near-complete collapse.

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