The Great Trade Collapse…VoxEU
Richard Baldwin at VoxEU introduces a new book on “great trade collapse” before the WTO meeting occurring shortly.
Re-posted with attribution:
The Great Trade Collapse
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.
The world’s trade ministers gather at the WTO next week just as the world’s trade is starting to recover from the “great trade collapse” – the sharpest drop in recorded history and deepest since WWII.
Vox has today posted an Ebook “The Great Trade Collapse: Causes, Consequences and Prospects” that aims to tell the world’s trade ministers what economists’ know about the trade collapse.
The Ebook can be downloaded for free from http://www.voxeu.org/index.php?q=node/4297
Hard copies of the book may be ordered by emailing Anil Shamdasani: AShamdasani@cepr.org.
Establishing consensus on the cause
The two dozen chapters establish a consensus on what caused the collapse. In a nutshell, it was caused by the sudden postponement of purchases, especially of durable consumer and investment goods. Trade fell far more than GDP, since the demand shock was amplified by “compositional” and “synchronicity” effects.
•“Compositional effect”: In the 4th quarter of 2008 and 1st quarter of 2009, the Lehman-induced ‘fear factor’ caused consumers and firms around the world – but especially in the US and EU – to freeze; expenditures were postponed until things became clearer. The sales/production of “postponeables” plummeted, dragging down GDP growth rates. However, since the composition of GDP places much lower weight on postponeables than the composition of trade, the same shock had a substantially larger impact on trade than it did on GDP; the lion’s share of trade takes place in manufactures, mostly final durable consumer and investment goods, and related parts and components.
•“Synchronicity effect”: National drops in trade were large – many attaining post-war records – but the world trade drop was much larger than previous episodes, since almost every nation’s trade dropped sharply; there was no averaging out this time. The synchronisation was probably due to the global and instantaneous transmission of the ‘fear factor’, and partly due to the development of international supply chains that reacted “just in time” to the collapse in demand for postponeables.
Other factors
Some of the chapters find evidence for supply-side factors, but other do not. The supply shocks considered include: the impact of the credit crunch on the specialised financial instruments that grease the gears of international trade (e.g. letters of credit), bankruptcy-induced disruptions of international supply chains, and protectionism.
The best available evidence suggests that declines in global trade finance have not had a major impact on trade flows. Policy responses aimed at shoring up trade credit were early and massive; these may have prevented credit from being more of a problem than it was.
There is no evidence that protectionism played a direct role so far; there has been plenty of new protection, but is has been applied to small trade flows.
Finally, there is almost no evidence that supply chains have collapsed. Direct evidence from firm-level data shows that the exits of firms from trade relationships (i.e. the extensive margin) has not played an important role in this crisis.
If the global economy recovers, the recovery of global trade – which seems to have started in mid-2009 – is likely to be rapid, with pre-crisis growth rates being reached next year. This could foster growing imbalances.
Consequences
Several authors warn that the global imbalances are a problem for the trade system as well as for the macro and financial system. As unemployment in many nations is projected to rise, or at least remain high, pressures for a protectionist backlash could grow over the coming year or two. To avoid this, and to prevent laying the foundations for another global crisis down the road, the US, China and other nations with large trade imbalances should undertake the necessary macroeconomic adjustments, such as exchange rate realignments, and designing credible plans for long term fiscal sustainability.
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The timeline is still screwed up in myu opinion.
On or about July 15,2008, America parked their cars and oil prices started their plunge. About Aug 2008 retail shopping centers actoss the US were cancelling orders. Looking up the Baltic Dry Index, I see it crashed shortly thereafter, the summer of 2008, before Lehman crash and after the oil crash.
Matt,
I think oil prices are important but it’s hard to directly tie them to downturns. However, they have an uncanny habit of preceding recessions.
This collection of articles (chapters) is worthy of more AB posts. I read all of the chapters earlier. A good collection of opinions.
Even if oil is somehow prescient, we still have the problem in the timeline of the Baltic dDry Index crashing before the Lehman results. Reading into Baldwin, I see he takes his trade numbers after they are reported financially, and these numbers will arrive one than a month after the actual ships stop running.
What we are seeing is financial bias, the editor does not recognize numbers until they have been converted into a financial sheet. Instead of looking back through money flows, the researcher needs to look back through goods flow.
But this does bring up a technology problem for the banks. In the new technology, I can actually dial in a satellite image and construct trade flows from shipping in real time while bankers await financial sheets. Are bankers out of date with technology and are they being beaten to the punch?
Of course the great trade collapse could not possibly be related to massive and chronic job and income loss in the US as a reult of that very same “trade”.
If the US citizens continue to allow the mercantilist monster to clean their clocks (labor arbitrage) we probably deserve what we get. The economics profession has shown themselves incapable of objective analysis, even in the face of massive evidence contrary to their sacred paradigms. Allowing mercantilist import penetration in the US to decimate the idustrial capacity of the US economy is not only stupid and willfully ignorant, history suggests it is a major cause of war.
What possibly could be the cause of massive dometic unemployment, an unprecedented rise in personal indebtedness, falling incomes and wealth polarization, a rise in poverty levels, massive government deficits, collapse of domestic manufacturing, erosion of the middle class. Must be productvity and could not possibly be related to a world trade structure built on a foundation of manipulated foreign exchange. After all, the foreign exchange rate really has no influence on the international competitive pricing of goods and services. Pay no attention to the white elephant in the middle of the room.
The collapse of world trade as currently practiced is and was inevitable because the imbalances have become de-stabilizing. At least we should stop bullshitting ourselves. Every purchase of a foreign made car or trip to Walmart, favors off shore employment, reduces the domestic income levels, weakens the opportunities for our children, and on and on. How many US made cars are sold in Germany, Japan, China, South Korea, Vietnam or Saudi Arabia. Let’s at least be honest with ourselves, even if the economists are incapable. Self deception is not consistent with self preservation. And sometimes, neither is trade.
http://www-personal.umich.edu/~lormand/poli/nike/nike101-8.htm
I don’t know if the following analysis is correct or not but for a $70 pair of nike sneakers production costs are $20, Sales, distribution, & research are $15.50, and $34.50 goes to the retailer, and then about $4.3 goes to sales tax.
So what you have here is an industry where production is shipped overseas yet the bulk of the benefit is derived in the home country. I just can’t understand the logical argument on how we would be better off not engaging in foreign trade. If the costs were to go up by 50 percent if we produced them here basic economic analysis tells us that we would consume less and its unclear that in the end given all the benefit we derive from sales, maketing, and distribution that we would be better off by doing everything locally.
Cantab,
I have failed to find anyone advocating ridding ourselves of foriegn trade or being totally local in production. Can you point me to someone?
Guest,
I can find plenty that want to manage trade – I think that’s good enough motivation to make the point I wanted to make. If most of the value in the value stream is downstream of production then it seems this is where you want to be leaning.