The main problem with the consensus view of the Great Trade Collapse is that the underlying analysis is based on empirical analyses of post Second World War data only, even in studies claiming a “historical perspective” (e.g. Freund 2009 and Hong, Lee and Tang 2009). Typically economists have not included the Black Swan of the 1930s in their analysis and have compared the usual fluctuations in international trade (as observed in the post war period) to the exceptional trade collapse in 2008-9 (a notable exception is Eichengreen and O’Rourke 2009).
The postwar experience, however, is not the proper reference period to make a sensible analysis of the recent trade collapse and actually such a comparison may produce misleading conclusions and policy advice. It is clear that a world trade collapse differs from business as usual, but the relevant issue is to what extent the world trade collapses in the 1930s and the 2000s differ and how.
In recent research (van Bergeijk 2011), I study the drivers of the two world trade collapses, exploring the substantial cross-country variation in the decline of import volumes of 27 economies in the 1930s and 45 economies in the 2000s (see Figure 1).
Demand shock and composition effects
The narratives for the 1930s and 2000s produced a long list of factors that have been shown – or assumed – to have caused or aggravated the world trade collapse (see Baldwin and Evenett 2009, Estevadoreal et al. 2003, Freund 2009, Jacks et al. 2011, WTO 2009). These narratives agree on two key drivers: a demand shock and the composition effect that aggravated it (see also Baldwin 2009). So one important driver of the trade collapse is the reduction in GDP (representing macroeconomic demand). Typically the change in trade (turnover) is expected to be a multiple of the change in GDP (value added) also because of several composition effects:
- The share of services (which are less volatile) in GDP is much larger than in international trade.
- The share of consumer and capital goods in trade is much larger and a demand reduction will in general be especially felt in these products.
- Additionally, manufacturing trade consists of international composites and products in different stages of production may cross borders many times and international trade will then be double counted every time that a component/product moves from one country to another.
Yet another aspect of manufacturing trade is the international division of labour -- that is, the organisation of production in international value chains. In the early phase of the recent trade collapse it was argued that the network of international value chains could explain both the propagation of shocks (the simultaneity of the trade collapse in many countries) and the severity of the trade shock. This value chain argument mainly rests on the observation that the share of intermediate products in international trade and the elasticity of world trade to GDP increased significantly over recent decades. Therefore observers such as Freund (2009) and Cheun and Guichard (2009) have assumed a mechanical, causal relationship between the two. Fragmentation of production is by implication a driver of the world trade collapse.
Potentially counterbalancing effects, however, are also likely as suggested by Bénassy-Quéré et al. (2009) who relate the overshooting of trade to omitted variables, or van Marrewijk (2009) who observes negative and insignificant correlations between the speed/severity of the collapse and intra-industry trade and argues that this reflects the capacity of value chains to spread trade shocks over many countries thus providing a cushion.
Other examples of beneficial “collapse dampening” effects of value chain activities comprise the larger trust among repeat buyers and the use of non-bank-intermediated trade credit (van Bergeijk 2010). The upshot is that the direction of the impact of global value chains during a global crisis is not clear and is essentially an empirical matter. Empirical studies that analyse the relationship between value chain activities and world trade are, however, contradictory. One contribution of this column is that it provides a multi-country perspective and the first test of this hypothesis in a cross-country setting for 1929-32, 2008-10 and the full sample.
While my analysis does offer some support for the professional consensus that identifies decreases in domestic demand and the composition of trade as key determinants, I also find substantial differences between the 1930s and the 2000s. Both the demand shock and the composition effect are comparatively speaking much less important in the recent trade collapse than in the 1930s. This is a remarkable and exciting finding given the profession’s early and outspoken conviction that supply chains were a (if not the) driver of the extraordinary trade developments in late 2008 and early 2009.
The empirical investigation also identifies country-specific determinants (level of development, political system and openness) that have not (yet) been considered in the mainstream narrative for the recent world trade collapse. In line with the theory of trade uncertainty (van Marrewijk and van Bergeijk 1993, van Bergeijk 2010), I find that more democratic, more open, and wealthier countries reduced their imports to a smaller extent.
Interpretation and policy implications
The correlation between international value chain activity and globalisation in the period before the trade collapse constitutes the basis for the mainstream narrative on the impact of value chain activity on openness. This correlation may be genuine, but in view of my findings it requires a different interpretation. Globalisation is a firm-driven process and fragmentation of production according to the available evidence has been associated with an increase in the world’s trade-to-GDP-ratio. The underlying mechanism may, however, be quite different from the purely mechanical statistical relationship that relates to the different modes of measurement regarding GDP (value added) and trade (gross value). Value chain interaction may breed trust amongst participating firms because of the repeated-buy character of the transactions and/or have external effects (such as demonstration, learning or network effects) that support globalisation. If so, there is no reason why this role should be asymmetrical (positive in upswings and negative in downturns) as assumed by the dominant narrative.
This has important implications both for the analysis of the world trade collapse and policy advice to stabilise economies by means or a reorientation towards domestic production. The purely mechanical reasoning implies that a collapse can be strong, but that the rebound will be equally strong. One policy story would seem to be that fragmentation of international value chains increases the fragility and instability of international exchange (and this may induce governments to attempt to become less dependent on intermediate products imported from other countries; see Escaith 2009). Yet another policy story could be that no special worries are in order since the process will assure a quick return to the status quo ante (Tanaka 2009).
The problem with these stories should be clear. In view of my findings, it would seem more logical that international value chains offered support for internationalisation, not only before but also during the recent world trade collapse. If so, policies aimed at reducing the extent to which firms organise themselves in international networks will be very counter-productive. This suggests as a minimum that additional efforts are in order to increase trust in the trading system and that the period in which government policies will have to support and guide market processes could be longer than expected.
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