Tuesday, May 24, 2011

Causes of the Great Trade Collapse of 2009

This blog post is adapted from Robert C. Feenstra’s1 summary of research of the International Trade and Investment (ITI) Program at NBER. It summarizes various papers that explore and explain the causes of the great trade collapse of 2009. Here is a blog post about what economists thought were the reasons for the collapse in trade by about 30 of world GDP in 2009.

The financial crisis and great recession of 2008-9 brought with it a "great trade collapse": world trade relative to GDP fell by nearly 30 percent between these two years, exceeding the experience of other post-war recessions. Why did trade fall so much, and why did it recover relatively quickly? The leading explanations stress, in varying degrees, the roles of: inventory adjustment for imports; demand for durable versus non-durable goods; the use of intermediate inputs in trade, which might magnify the impact on trade as "supply chains" are temporarily disrupted; and the role of trade credit, which appears to have dried up temporarily during the crisis.

Beginning with the last of these explanations, Kalina Manova and her co-authors provide the strongest evidence supporting the role of credit constraints on exports. These constraints limit the extensive margin of exports in sectors that are most vulnerable to financial stress.2 Furthermore, she argues that such sectors faced greater reductions in their exports to the U.S. market during the financial crisis. 3 That idea is confirmed for Japan by Mary Amiti and David Weinstein.4 They find that Japanese exporters faced greater reductions in their sales abroad if they were affiliated with main banks that performed poorly. Focusing on China, my co-authors and I find that firms faced tighter credit constraints on their exports than on their domestic sales, and that exports experienced a significant slowdown because of the 2008 crisis.5 Ann E. Harrison and her co-authors find that, for the United States, import prices often rose during the crisis, which is inconsistent with falling demand but can arise from a supply constraint, such as a lack of export credit.6

Other work casts some doubt on the importance of export credit. George Alessandria and co-authors instead stress the role of inventory adjustment, which can lead to a rapid fall in imports as stocks are adjusted downwards.7 Andrei Levchenko, Logan Lewis, and Linda Tesar also find a limited role for trade credit in their regression analysis of U.S. trade, but they use an accounting definition of "trade credit" that applies equally well to exports or domestic sales.8 As an alternative explanation, they find that sectors which are more reliant on imported intermediate inputs suffered more during the crisis, because these supply chains were temporarily disrupted. Fabio Ghironi and his co-authors also stress the importance of imported inputs. They model the different components of aggregate demand (consumption, investment, government spending, and exports) as having different import intensities.9 They then construct a weighted average of those factors with the weights reflecting their import intensities. Using the resulting variable as an income term, and including an import price, they are able to construct a model that predicts the fluctuations in import demand during the current crisis and earlier episodes much more accurately than do conventional methods that rely on GDP and aggregate prices.

Of course, in the end it will be a combination of factors that explain the great trade collapse: even if inventories or imported intermediates are more important quantitatively, that finding need not detract from the significance of trade credit. Amiti and Weinstein, for example, argue that trade credit can account for about 20 percent of the fall in exports for Japan, so it was not the most important factor, but it was still economically significant. That point is also made for Peruvian exports by Veronica Rappoport and co-authors, who argue that the reduction in loans from banks performing poorly reduced aggregate exports by 15 percent during the crisis.10 Perhaps the most comprehensive evaluation of the different factors contributing to the great collapse in trade was written by Jonathan Eaton, Sam Kortum, Brent Neiman, and John Romalis.11 They argue that the relative decline in demand for manufactures was the most important driver of the decline in manufacturing trade, and especially the decline in demand for durable manufactures. These factors account for more than 80 percent of the global decline in trade/GDP. While they find that trade frictions increased and played an important role in reducing trade in some countries, notably China and Japan, these frictions only had a small impact on global trade.

1 Feenstra directs the NBER's Program on International Trade and Investment and is a Distinguished Professor of Economics at the University of California, Davis.

2 K. Manova, "Credit Constraints, Heterogeneous Firms, and International Trade," NBER Working Paper No. 14531, December 2008.

3 D. Chor and K. Manova, "Off the Cliff and Back? Credit Conditions and International Trade during the Global Financial Crisis," NBER Working Paper No. 16174, July 2010.

4 M. Amiti and D. E. Weinstein, "Exports and Financial Shocks," NBER Working Paper No. 15556, December 2009.

5 R. C. Feenstra, Z. Li, and M. Yu, "Exports and Credit Constraints under Incomplete Information: Theory and Evidence from China," NBER Working Paper No. 16940, April 2010.

6 M. Haddad, A. E. Harrison, and C. Hausman, "Decomposing the Great Trade Collapse: Products, Prices, and Quantities in the 2008-2009 Crisis," NBER Working Paper No. 16253, August 2010.

7 G. Alessandria, J. P. Kaboski, and V. Midrigan, "The Great Trade Collapse of 2008-09: An Inventory Adjustment?" NBER Working Paper No. 16059, June 2010.

8 A. A. Levchenko, L.T. Lewis, and L. L. Tesar, "The Collapse of International Trade During the 2008-2009 Crisis: In Search of the Smoking Gun," NBER Working Paper No. 16006, May 2010.

9 M. Bussiere, G. Callegari, F. Ghironi, G. Sestieri, and N. Yamano, "Estimating Trade Elasticities: Demand Composition and the Trade Collapse of 2008-09," presented at the International Trade and Investment Program Meeting, March 25-26, 2011.

10 D. Paravisini, V. Rappoport, P. Schnabl, and D. Wolfenzon, "Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data," NBER Working Paper No. 16975, April 2011.

11J. Eaton, S. Kortum, B. Neiman, and J. Romalis, "Trade and the Global Recession," NBER Working Paper No. 16666, January 2011.