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.

Lionel Fontagné, Guillaume Gaulier, 27 November 2009

Detailed firm-level data on French exporters suggests most of the trade collapse occurred in exporters’ volumes rather than the number of exporters. Small exporters suffered similarly to their larger counterparts. There is clear evidence that the impact was greatest on firms in sectors that rely most heavily on external finance. Thus, the crisis may not have long-lasting effects on aggregate export capacity – the reservoir of small and promising firms has not been decimated– but firms may reorganise to reduce vulnerability to external financing.

David Jacks, Christopher Meissner, Dennis Novy, 27 November 2009

Trade has declined massively during the crisis. This chapter assesses the relative roles of falling demand and rising trade costs in explaining the collapse and compares it to the Great Depression. Surprisingly, the authors calculate that the increase in trade costs today is as large as in 1929 despite the absence of any modern protectionism resembling Smoot-Hawley. If their calculations turn out to be correct, reviving global demand alone will be insufficient to revive world trade.

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. VoxEU today posts a new Ebook – written for the world's trade ministers gathering for the WTO's Trade Ministerial in Geneva – that presents the economics profession's received wisdom on the collapse. Two dozen chapters, written by leading economists from across the planet, summarise the latest research on the causes of the collapse as well as the consequences and prospects for recovery.

Jesse Mora, William Powers, 27 November 2009

The giant and global drop in trade was concurrent with an equally colossal and global credit crunch. Did the financial market turmoil directly disrupt trade by reducing the availability of trade financing? This chapter marshals the best available evidence on the importance of trade-credit financing as a cause of the crisis. Surveys of participants indicate that trade-credit problems were the number two cause of the trade collapse (after demand). Europe and North America experienced bigger problems early in the crisis, but by mid-2009, the problem was mainly felt in Eastern Europe and Africa. The scant direct evidence, however, suggests that the drop in trade credit was shallower than the drop in trade. Policy responses to shore up trade credit were early and massive; these may have dampened credit problems.

Michael Ferrantino, Aimee Larsen, 27 November 2009

The US was critical to the global trade collapse and will be pivotal to the sustainability of the ongoing trade revival. This chapter documents the US role in the great trade collapse. It warns that the US trade recovery is relatively fragile, as it started late, has been dependent on a one-time stimulus for autos, and has not stimulated demand for imported capital goods as much as consumer goods. It is thus unclear whether US import demand can support other economies’ recoveries without a significant improvement in US business confidence.

Léonce Ndikumana, Tonia Kandiero, 27 November 2009

The trade collapse hit Africa hard, particularly its exporters of natural resources and manufactured goods. As commodity prices have started to recover, so has African trade. This chapter recommends concluding the Doha round of WTO negotiations and investing in Aid for Trade initiatives to make the revival sustainable and support developing economies’ long-term interests.

Joaquim Oliveira Martins, Sónia Araújo, 27 November 2009

Using monthly trade data for OECD nations, this chapter first highlights the very exceptional nature of the great trade collapse. It then presents evidence to suggest that the magnitude of the global decline reflects greater synchronisation of trade flow declines across countries.

Carlo Altomonte, Gianmarco Ottaviano, 27 November 2009

The precise role of supply chains in the trade collapse is an unsettled matter. This chapter marshals evidence behind the notion that trade within international supply chains has been more resilient than other trade during the great trade collapse.

Peter Schott, 27 November 2009

If the current “shock” to US trade is similar to previous ones, most of the decline in exports and imports stems from a decline in sales of previously exported goods rather than a decline in the number of products exported. To the extent that is true, trade will bounce back relatively quickly once conditions improve. The alternative view is that the severe credit crunch produced a higher-than-usual share of harder-to-reverse firm exits – potentially dampening the speed of recovery. Even if this did occur, history suggests that it will be concentrated amongst small firms which account for only a small fraction of US exports; US multinationals dominate US trade and these firms have the wherewithal to weather the credit crunch. Should the dollar continue to decline, US firms will broaden the range of products exported and the range of markets reached, putting further downward pressure on the trade deficit.

Raymond Robertson, 27 November 2009

One of the nations hit hardest by the great trade collapse is Mexico– its trade falling over 40% in the six months following September 2008. Mexico’s imports and exports, however, have both recovered remarkably in recent months and are now three-quarters of the way back to peak values. This chapter argues that Mexico’s close engagement with the US industrial supply chain accounts for these unusually sharp movements.

Rudolfs Bems, Robert Johnson, Kei-Mu Yi, 27 November 2009

International supply chains – or vertical linkages – are a leading contender for explaining why the great trade collapse was so great. This chapter presents research aimed at quantifying the consequences of intermediate goods import linkages for the transmission of shocks and declines in trade. It highlights the importance of vertical linkages and specific sectoral shocks in accounting for the sudden, severe, and synchronised collapse of global trade in the aftermath of the Lehman debacle.

Kiyoyasu Tanaka, 27 November 2009

Japan’s trade was particularly hard hit by the great trade collapse. This chapter marshals evidence for the idea that Japan’s extensive involvement in international supply chains was a major reason for its larger and faster than average trade collapse.

Andrei Levchenko, Logan Lewis, Linda Tesar, 27 November 2009

US trade has experienced an unexpectedly large drop – seven standard deviations more than that predicted by theory. We evaluate three leading hypotheses on its causes: the vertical linkages effect, the compositional effect, and the credit effect. Using highly disaggregated US trade and production data, we show that between 50% and 100% of the drop is due to a “compositional effect”, i.e. that trade fell systematically more in sectors that also experienced larger domestic output reductions. The trade drop was also particularly concentrated in sectors marked by strong vertical linkages. We find no evidence that US trade was significantly hindered by trade credit problems.

Leonardo Iacovone, Veronika Zavacka, 27 November 2009

Was the global credit crunch a cause of the great trade collapse? This chapter addresses this question by drawing on evidence from 23 historical banking crises. It shows that export growth was particularly slow in sectors that were particularly reliant on external finance (e.g. electric machinery). The findings suggest how credit problems may have played a role in today’s global crisis. The historical findings show that negative demand shocks have amplified negative effects on exports when teamed with a banking crisis, with this interaction being especially important in durable goods industries. The same combination of factors (financial constraints coupled with a demand slump) – but this time it is operating on a vastly larger scale – may have been central to the great trade collapse.

Caroline Freund, 27 November 2009

Previous global trade collapses provide insight into why trade has dropped so dramatically this time – and the future of trade and global imbalances. The findings suggest that the real trade drop in 2009 is likely to exceed 15%, but it should rebound very rapidly. Global imbalances have also moderated in crises, but this tends to be temporary unless the downturn alters investment attitudes and/or government policies. Today, governments should use the transition to install policies that will ensure that imbalances do not revert to pre-crisis trends – policies to encourage saving in the US and prevent an overvalued dollar, and policies to stimulate spending in China and other parts of Asia and prevent undervalued currencies

Joseph Francois, Julia Woerz, 27 November 2009

By some measures, the trade collapse that started in late 2008 has shifted into a rapid recovery phase. The simplest explanation that fits the facts is that trade has followed the sectoral composition of the recession. The recession has been hardest on heavy manufacturing – machinery, vehicles, and related raw materials. This has translated into a deep manufacturing recession and an even deeper drop in trade. US and Chinese data show that these sectors are far more important in the composition of trade than they are in the composition of GDP.

Peter Draper, Gilberto Biacuana, 27 November 2009

Africa has been hard hit; its export revenue collapsed as both prices and volumes of commodity exports dived, and capital inflows shrunk. National budgets were hit as tariff revenue fell with imports and overseas development assistance slumped. Developed countries’ responses to the crisis have fed a growing backlash against the Washington Consensus, but major reversals of reforms seem unlikely. African policy makers tend to see the crisis as a temporary setback and are adopting coping strategies that reflect that view.

Kevin O'Rourke, 27 November 2009

Today’s great trade collapse has brought world trade to a point that is still substantially below the corresponding period during the Great Depression. The collapse, however, seems to be turning around along with the economic recovery. This chapter draws two critical Great-Depression lessons for today. First, policy makers must ensure that the recovery continues; many of the worst political and economic-policy transformations only came after the Great Depression was into its second and third years. Second, recent research shows that severe exchange rate misalignments teamed with rising unemployment led to much of the 1930s protectionism. The issue of the renminbi peg to the dollar is one that needs to be confronted sooner rather than later, for everyone's sake.



CEPR Policy Research