International trade is in the midst of recovery from its precipitous fall during the 2008-2009 global financial crisis (see Baldwin 2009). Are international markets for goods and services snapping back to their pre-crisis state or, alternatively, did the crisis give rise to long-lasting (even permanent) effects? An array of economists have contributed to this discussion and below are some of their answers contained in a new eBook published by the ECB, “Recovery and Beyond”.
Q: Is trade fundamentally different than it was prior to the crisis?
A: Opinions vary but, on balance, global trade will not fully bounce back to its pre-crisis scenario for some time to come.
- On one hand, the case for a symmetric recovery in world trade goes as follows. The trade downturn during the crisis was exceptional in many respects, although it can be at least partially reconciled with the composition of demand shocks affecting import-intensive industries, the inventory cycle, and the extent to which risk was reappraised in the wake of US housing market volatility. As several authors point out, trade was affected in ways unaccounted for by typical measures of price and income sensitivity (i.e. elasticity). Given that the above-mentioned factors were largely cyclical phenomena, it follows that measured trade elasticities should revert to their lower long-run values.
- However, the trade recovery could be uneven and drawn out if the crisis represented a structural change in those long-run elasticities. The crisis opened up an unprecedented gap between the actual level of world trade and its higher “equilibrium” level implied by historical relationships with GDP. This trade gap has been narrowing only gradually during the recovery and part of the gap could persist for some time to come for aggregate world trade, and the US in particular.
Q: Going forward, which mechanisms will contribute meaningfully to trade adjustment?
A: While the factors causing the crisis were diverse and multifaceted, it is arguable that persisting imbalances across the globe played a role. How will trade imbalances unwind and what is the role for policies influencing international transactions? To explore this issue in greater depth, several authors comment on existing and new channels connecting prices, income and export volumes, including: China’s exchange-rate policy, the impact of new product varieties on a country’s terms of trade, vertical integration and the measurement of trade elasticity, and the links between foreign direct investment and trade.
Q: Has the changing landscape of international traders affected individual countries’ trade elasticities? Do we need to rethink the way we assess competitiveness?
A: Yes and yes. Prior to the crisis, the internationalisation of production and supply chains had already been widely documented and studied. However, the crisis reinforced how much these relatively new phenomena matter for the international transmission of shocks and relative export performance. Measures of competitiveness could thus be broader in the following dimensions.
- How large a space should a given country occupy in global trade? The fixation of policymakers on export size as a gauge for competitiveness is an anachronism. For instance, over the past two decades the US share of world exports of goods fell from 11% to 8%. One possible explanation is that exporting firms in the US are simply less able to compete in international markets than they used to be. Alternatively, large parts of the fall in the US share could be attributed to the composition of the US export bundle and the country’s changing share in world GDP; these point to the inadequacy of the aggregate export share as an indicator of a country’s competitiveness.
- Relative export prices and underlining cost dynamics are also widely considered to be a bellwether for competitiveness. However, prices and labour cost considerations alone are often unable to explain export market share developments, for instance in the context of the euro area (see Figure 1). This suggests a more nuanced view of competitiveness which has, in turn, motivated the nascent literature on firm-level performance measures.
Figure 1. Export market shares and relative export prices of selected Eurozone countries (1999-2008)
- At the level of individual firms, the crisis stimulated a diversity of reactions to shocks depending upon their specific characteristics. In the short run, these features tended to be size, industrial organisation, technology/research intensity, and market conditions in their main sectors of specialisation; in the longer term, entry/exit barriers, firm maturity, and international trade frictions matter in determining how many firms survive and thrive. Therefore, for the same change in macro conditions in a country, overall competitiveness impacts will be different depending upon the specific configuration of firms. Understanding the differentiation of conditions across countries is thus critical to correctly assessing the impact of changes in macro conditions, be those resulting from external shocks or policy changes. Several chapters of the eBook report on this exciting area of current research.
In summary, the crisis has underlined an array of factors affecting trade adjustment and competitiveness. Two main themes run through the eBook. First, the robustness of the current trade recovery is very much an empirical question, though we appear to have gleaned several new insights regarding channels of transmission and their quantitative importance. Second, in a world of blurring international borders, competitiveness analysis needs to be broad-based. We view these lessons as instrumental in crafting effective policies to foster balanced growth.
The views expressed in this column are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System nor those of the European Central Bank.
Baldwin, Richard (2009) (ed.), The Great Trade Collapse: Causes, Consequences and Prospects, A VoxEU.org Publication, 27 November.