The Great Synchronisation: tracking the trade collapse with high-frequency data

Joaquim Oliveira Martins, Sónia Araújo 27 November 2009

a

A

Trade flows during the global crisis have fallen much more sharply than they did during the Great Depression (Barry Eichengreen and Kevin O’Rourke 2009). Figure 1 depicts total trade for OECD nations’ (nominal values) changes since 1965. Although there have been periods of sharp and sudden trade declines in the past, the one that took place at the end of 2008 is unique. After more than six years of positive trade growth, trade dived in October 2008, reaching a record negative growth of -37% in April 2009.

Figure 1 Trade, year-on-year monthly growth rates, January 1965 to June 2009.

Note: the OECD 23 group excludes the Czech Republic, Hungary, Republic of Korea, Mexico, New Zealand, Poland and Slovak Republic. These 23 OECD countries represent the bulk of international merchandise trade (approximately 88% of total OECD trade and 71% of total world trade). The blue bands identify major turning points associated with crisis episodes.

Source: OECD MSIT database

The magnitude of the current trade crisis stands out in comparison with previous drops in trade flows. Past crises averaged 13 months and -2% growth, with the worst negative growth rate being registered in October 1982 (at -14%).1 In comparison, the average negative growth rate between October 2008 (the first month of negative year-on-year growth rate in trade turnover for the 23 OECD economies) and June 2009 was -25%.

Such drops in nominal trade values are rare events. Of the 534 months from January 1965 to June 2009, trade growth was negative in only one-sixth of the months. Today’s trade collapse is extraordinary in its magnitude and duration. Figure 2 plots all of the 534 monthly growth rates – sorted by size, not chronologically – with the changes in OECD trade since November 2008 shown in red. The seven months since October 2008 are in a class of their own: they are the seven biggest monthly drops since 1965, and the only ones where the drop exceeded 20%.

Figure 2 Monthly year-on-year growth rates (sorted by decreasing order), January 1965 to June 2009.

Note: Bars in red represent year-on-year monthly trade decline as from November 2008.

Source: OECD MSIT database.

A large, although less unique, fall for individual countries

When looking at trade series for individual countries, the current collapse also appears to be the sharpest by historical standards, though perhaps in a less unique way. Several OECD countries have experienced drops of large magnitudes in the past. In July 1993, France’s total trade decreased by 23% relative to its value in July 1992. In the same year, trade declined by more than 20% in January and July in Italy, and in Germany, with Italy registering four more months of negative trade growth below 20%. In Japan, trade dropped by approximately 25% relative to the same month in the previous year in December 2001. In the US, trade dropped by 34% and 24% in January 1965 and 1969, respectively.2

Araújo and Oliveira Martins (2009) published a similar analysis in July 2009. At that time, however, trade data were only available up to March 2009 and the collapse of trade, by individual country, did not emerge in the same way as the most recent figures. This means that in the early months of the crisis most of the pattern observed at the aggregate level was due to a very strong synchronisation of the trade drops across countries.3 During the first half of 2009, the crisis propagation mechanisms strengthened and country collapses became much larger, reaching nearly -40% in several cases.

The global trade collapse is uniquely synchronised

Figures 3 and 4 illustrate how strikingly synchronised the collapse has been. The figures display, for exports (Figure 4) and imports (Figure 5), the percentage of OECD countries that exhibit monthly year-on-year trade growth rate that is either: (i) negative; (ii) below -5%; or (iii) below -10%.

Figure 3 “Great Synchronisation”: % countries with negative export growth.

Note: The analysis includes all 30 OECD member countries since January 1998.

Source: OECD MSIT database.

This remarkable degree of synchronisation emerges rather neatly. Although there have been previous episodes of synchronised trade declines, namely following the ‘dot.com’ crisis in 2001, the fraction of nations with negative trade growth by the end of 2008 is astounding. More than 90% of OECD countries simultaneously exhibit a decline in exports and imports exceeding 10%. This share reached 100% at the end of the 2009Q1.

Not only are the drops large, but they have also been longer lasting than usual. Drops in exports growth of more than 10% occurred in more than 90% of the OECD countries in seven out of the nine months since the beginning of the ‘trade crisis’ (Oct 2008 – June 2009). On the import side, all OECD countries have registered negative growth values of more than 10% since January through to June 2009. In summary, it is the synchronised and large drop in trade, in every OECD country, that explains the collapse in international trade.

Figure 4 “The Great Synchronisation”, % of countries with negative import growth.

Note: The analysis includes all 30 OECD member countries since January 1998.

Source: OECD MSIT database.

Which sectors have contributed the most to the trade collapse?

The current trade collapse has not occurred evenly across all products. Table 1 displays the contribution of the top-four product categories to the collapse, from the first quarter of 2008 to the first quarter of 2009. The largest contribution is from the drop in ‘machinery and transport equipment’ – roughly one-third of the decline for the OECD. A possible explanation for this pattern is the high degree of fragmentation in this sector’s production chains (Escaith and Gonguet 2009). Additional factors could be the excess supply existing in mature OECD automobile markets, as well as the end of a technological product cycle in the automotive industry. Another sector that has contributed significantly to the collapse is ‘mineral fuels and related products’. Here both price and demand volume effects associated with the economic recession explain most of the larger drop.

Table 1: Top-4 contributions to trade decline by product categories, 2009Q2 to 2008Q2.

Note: Contribution of each product category to the aggregate growth rate.

Source: OECD MSIT database

Service trade has been more resilient than trade in goods

Using quarterly data from the OECD Balance of Payments database, we see that the impact on traded services has been quite different. Trade in services also exhibited a synchronised decline in the last quarter of 2008.4 The decline in services, however, has been much less sharp than the decline in goods. In the last quarter of 2008 and the first quarter of 2009, trade in goods and services declined at similar rates in only a small group of OECD countries (Korea, New Zealand, Norway and Poland). In the second quarter of 2009, exports and imports of both goods and services seem to be rising in a few OECD countries: Austria, France, Germany, Ireland, Netherlands, New Zealand, Portugal and Sweden. In Hungary and Spain, only exports are increasing. In the UK, all series seem to be rebounding, with the exception of services’ exports, which seems to have stopped its downward trend. In other countries, services appear to be more resilient, as their exports and imports of services exhibit, in the second quarter of 2009, an upward trajectory compared with their trade in goods. The latter are still declining or stagnating. This is the case for Canada, Finland and Italy.

Summary

While several culprits have been proposed to explain the current trade collapse (e.g. the credit crunch, global production chains, generalised loss of confidence), the great synchronisation underlying the collapse suggests that it is very probably their interaction, rather than each individual effect, that might best explain why international trade has taken such an epic hit in this global crisis.

The high-frequency pattern of trade flows also reveals systemic propagation effects during the crisis that would be interesting to analyze further, as well as new patterns in the structure of trade flows. All these issues open interesting research questions for international trade economists.

Footnotes

1 Here, periods of trade crisis are identified as periods of negative growth, which end in the month predating three consecutive months of positive trade growth.

2 Note that months of negative growth below 10% are much more frequent: 35 for Italy, 34 for France, 32 for Japan, 29 for Germany and the UK and 23 for the USA, while total trade for the 23 OECD countries under analysis dropped by more than 10% in 13 of the 531 months between January 1965 and March 2009, inclusive.

3 See Burstein et al. (2008) for a discussion on international trade propagation mechanisms.

4 Almost half of the OECD economies showing a stagnation or decline already in the third quarter of 2008 for all the four series (exports and imports of goods and services): Austria, Czech Republic, Denmark, Finland, France, Italy, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland and the UK

References

Araújo, S. and J. Oliveira Martins (2009), “The Great Synchronisation: what do high-frequency data statistics tell us about the trade collapse?”, VoxEU.org, 8 July 2009.

Burstein, A., Kurz, C. and Tesar, L. (2008), “Trade, Production Sharing and the International Transmission of Business Cycles”, Journal of Monetary Economics, 55, pp. 775-795.

Eichengreen, B. and K. O’Rourke (2009). “A Tale of Two Depressions,” VoxEU.org, 4 June 2009.

Escaith, H. and F. Gonguet (2009), “International Trade and Real Transmission Channels of Financial Shocks in Globalised Production Networks”, Staff Working Paper, ERSD-2009-06, WTO, Economic Research and Statistics Division.

Freund, C. (2009). “Demystifying the collapse in trade,” VoxEU.org, 3 July 2009.

OECD Monthly Statistics of International Trade (MSIT).

a

A

Topics:  International trade

Tags:  great trade collapse, synchronisation effect

Head of the Regional Competitiveness and Governance Division at the OECD

Economist at the Statistics Department of the OECD

Events