The great trade collapse: What caused it and what does it mean? Richard Baldwin
27 November 2009
World trade experienced a sudden, severe, and synchronised collapse in late 2008 – the sharpest in recorded history and deepest since WWII. This ebook – written for the world's trade ministers gathering for the WTO's Trade Ministerial in Geneva – presents the economics profession's received wisdom on the collapse. Two dozen chapters, written by leading economists from across the globe, summarise the latest research on the causes of the collapse as well as its consequences and the prospects for recovery. According to the emerging consensus, the collapse was caused by the sudden, severe and globally synchronised postponement of purchases, especially of durable consumer and investment goods (and their parts and components). The impact was amplified by “compositional” and “synchronicity” effects in which international supply chains played a central role.
The “great trade collapse” occurred between the third quarter of 2008 and the second quarter of 2009. Signs are that it has ended and recovery has begun, but it was huge – the steepest fall of world trade in recorded history and the deepest fall since the Great Depression. The drop was sudden, severe, and synchronised. A few facts justify the label: The Great Trade Collapse. It was severe and sudden
Global trade has dropped before – three times since WWII – but this is by far the largest. As Figure 1 shows, global trade fell for at least three quarters during three of the worldwide recessions that have occurred since 1965 – the oil-shock recession of 1974-75, the inflation-defeating recession of 1982-83, and the Tech-Wreck recession of 2001-02. Specifically: •
The 1982 and 2001 drops were comparatively mild, with growth from the previous year’s quarter reaching -5% at the most. •
The 1970s event was twice that size, with growth stumbling to -11%. •
Today collapse is much worse; for two quarters in a row, world trade flows have been 15% below their previous year levels. The OECD has monthly data on its members’ real trade for the past 533 months; the 7 biggest month-on-month drops among the 533 all occurred since November 2008 (see the chapter by Sónia Araújo and Joaquim Oliveira). Figure 1 The great trade collapses in historical perspective, 1965 – 2009
Source: OECD Quarterly real trade data.
The great trade collapse is not as large as that of the Great Depression, but it is much steeper. It took 24 months in the Great Depression for world trade to fall as far as it fell in the 9 months from November 2008 (Figure 2). The latest data in the figure (still somewhat preliminary) suggests a recovery is underway. Figure 2 The great trade collapses vs. the Great Depression
Source: Eichengreen and O’Rourke (2009), based on CPB online data for latest. It was synchronised
All 104 nations on which the WTO reports data experienced a drop in both imports and exports during the second half of 2008 and the first half of 2009. •
Figure 3 shows how imports and exports collapsed for the EU27 and 10 other nations that together account for three-quarters of world trade; each of these trade flows dropped by more than 20% from 2008Q2 to 2009Q2; many fell 30% or more. Figure 3 The great trade collapse, 2008 Q2 to 2009 Q2
Sources: WTO online database.
Figure 4 shows that world trade in almost all product categories were positive in 2008Q2, almost all were negative in 2008Q4, and all where negative in 2009Q1. The categories most marked by international supply chains (Mechanical and electrical machinery, Precision instruments, and Vehicles) saw some of the biggest drops, and detailed empirics in the chapter by Bems, Johnson and Yi finds that supply chains were hit harder controlling for other factors. The chart, however, shows that the falls were by no means extraordinary large in these sectors. Figure 4 All types of goods trade collapsed simultaneously
Source: Comtrade database....
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