There is currently an asymmetric contraction in merchandise trade focused on Europe. Data from CPB World Trade Monitor show real Eurozone imports declining by 7.7% in the 12 months ending May 2012, at a time when real world trade has expanded by 3.0%. Moreover, the contraction is already nearly half as large as the greatest year-on-year contraction of Eurozone imports in the Great Trade Collapse (18.2% for the period ending April 2009). Africa and the Middle East are more connected to Europe than are other regions, and contain a number of small, trade-exposed economies. The impact of the EU’s import collapse is thus disproportionately felt in its developing neighbours, some of which may currently be experiencing drops in export demand large enough to induce recession on their own in the absence of any other shock. Since trade data are released with greater frequency than GDP data, especially for developing countries, the drop in trade can be an important monitoring tool in tracking such shocks. The experience of the Great Trade Collapse of 2008-2009 (Baldwin 2009) suggests that we ought to pay attention. One of the features of the Great Trade Collapse was that trade contracted in a synchronised fashion everywhere in the world. Thus, there was not much attention paid to the geographic pattern of transmission of demand shocks through trade, though there were some attempts to tease out parts of the story (Ferrantino and Larsen 2009).
The fact that most countries in Africa and the Middle East are primary product exporters doesn’t help. If an exporter of consumer electronics experiences reduced demand, a large share of the demand shortfall is experienced by the suppliers of imported intermediate inputs, cushioning the blow on domestically generated value added. However, primary products are at the front end of the supply chain, and primary product exports have a significantly higher share of value-added than do complex manufacturers. Koopman et al. (2011 revised, Table A2) report that in 2004, foreign value added for Russia and Brazil, which export mostly primary products, amounted to only 10% and 13% of the value of gross exports respectively. By contrast, that subset of Chinese and Mexican exports involved in processing trade. contain 57% and 63% of foreign value added, respectively. (The global average is around 22%). Thus for most countries, and for primary product exporters especially, a drop in export demand is likely to be felt directly, with relatively little pass-through to importers of intermediates.
Another feature, shared in common with earlier global contractions, was that the decline in trade magnified the decline in GDP, with this magnification being more dramatic in 2008-2009 (Freund 2009). In this case, the decline in Eurozone imports may actually be preceding the decline in GDP. OECD data show EU GDP with virtually zero change in the four quarters ending in Q1 2012, though seven of its members (Czech Republic, Greece, Hungary, Italy, Portugal, Spain, and the UK), have shown zero or negative growth in real GDP in the two previous quarters with available data. Thus, any further deepening of recession in the EU implies further impacts on sub-Saharan Africa (SSA) and the Middle East and North Africa (MENA)
To illustrate the impact of the EU import contraction on SSA and MENA, we first consider the ten largest sources of EU imports in that region. Beginning with nominal quarterly data on EU imports ending in Q1 2012, we use EU data as mirror data to measure each country’s exports to the EU. We then locate the peak in each country’s exports, measure the decline, and calculate the ratio of each country’s exports to the EU to its GDP. By multiplying these together, and annualising the result, we get a measure of impact comparable to annual GDP data. The results are summarised in Table 1.
Table 1. Selected MENA & SSA countries with significant exports to the EU
The export declines facing these countries are large enough to single-handedly induce a significant slowdown, if not recession. By comparison, the most recent IMF estimates for regional real growth in output in 2012 are 5.5% in MENA and 5.3% in SSA, which conceal substantial country variation difficult to monitor on a current basis. For some smaller and highly EU-exposed economies with the biggest export contractions, our annualised measure of the drop in exports to the EU relative to exporters’ GDP amounts to 15.4% for Swaziland, 10.4% for Lesotho, and 7.3% for Mauritania.
As noted above, the fact that most of these countries are primary product exporters means that they absorb this hit directly rather than passing it along the supply chain. 96% of Swaziland’s exports to the EU are sugar, fruit and nuts (including prepared fruit and nuts). For Mauritania, it’s 98% iron ore and fish; for Lesotho, 98% diamonds; for Côte d’Ivoire, 93% cocoa, crude rubber, petroleum, fruit and nuts, and wood. Tunisia may be more fortunate, in that it exports diversified manufactures and may be able to distribute some of its shock along the supply chain (e.g. ignition wiring sets for vehicles). The bad news for Tunisia is that it is on supply chains for apparel, machinery and footwear that pass through Italy and Spain, which together absorb one quarter of Tunisia’s exports to the world and which are both at greater risk than the rest of Europe.
By contrast, the EU’s imports from its major trading partners have not been as large, but they still show some interesting patterns, as shown in Table 2.
Table 2. Top ten EU trading partners
The drop in EU imports affected Asian trading partners first (Korea, Japan) and has not yet affected the US. China, India, Japan, and Turkey have all experienced double-digit declines in their exports to the EU from their recent peak. For China, Turkey, Switzerland, and India, these declines are currently on the order of 0.5%-2.0% of GDP, a non-trivial amount.
Both the relative magnitude and the early timing of the contraction of the EU’s imports from Asia raises the question of whether the current EU trade contraction is particularly focused on trade involving long supply chains and a high degree of vertical specialisation, as was observed by some in the Great Trade Collapse (Bems et al. 2009). The contractions in EU imports from China, Korea, and Japan are all either relatively early or relatively large. While this suggests a possible role in the contraction for supply chains in electronics and other Asia-centric trade flows, it is not dispositive. We do not at present offer a deeper examination, let alone a full-blown analysis of this phenomenon along the lines of Levchenko et al. (2010) to others. A deeper examination could help to shed light on some of the competing theories regarding the relationship between supply chains and trade contractions.
This article represents solely the views of the authors, and should not be considered to represent the views of the US International Trade Commission or any of its Commissioners. The authors are grateful to Richard Baldwin for helpful comments.
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