|Published in the run-up to the WTO 7th Ministerial Meeting, this Ebook tells trade ministers everything they ever wanted to know about the collapse of global trade that occurred during the crisis of 2008.|
|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 planet, summarise the latest research on the causes of the collapse as well as the consequences and prospects for recovery.|
|Establishing consensus on the cause|
|This collection of essays establishes a remarkable consensus on what caused the collapse. The great trade collapse was caused primarily by a demand-side shock amplified by the “compositional” effect, and the “synchronicity” effect.|
|“Compositional effect”: In 4th quarter 2008 and 1st quarter 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 “postpone-ables” plummeted, dragging down GDP growth rates. However, since the composition of GDP places much lower weight on postpone-ables than the composition of trade, the same shock had a vastly larger impact on trade than 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 postwar record – but the world trade drop was much larger since they all happened at once. Almost every nation’s trade dropped sharply from 2008Q3 to 2009Q1. The synchronisation was much greater this time partly 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 postpone-ables.|
|- The dollar value of commodity trade (about 15% of world trade) also plummeted due to a burst in the commodity price bubble (from mid 2008) and the global recession. |
- The evidence on the direct role of the credit crunch is mixed, some authors found evidence for it, others not.
- There is no evidence that protectionism played a direct role so far.
- There is almost no evidence that supply chains have collapsed.
|Consequences and prospects|
|The consensus is that 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 (assuming the global economic recovery continues). Several authors warned that the rapid revival of trade would produce growing global imbalances. As unemployment in many nations is projected to rise, or at least remain high, pressures for 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.|
|“Even by the standards of an extraordinary year, the collapse in global trade triggered by the financial turmoil of last autumn was spectacular. After having survived nearly a decade of shocks beginning with September 11 and ending in a global food crisis, the precipitate drop in commerce” |
Alan Battie, Financial Times, 24th November 2009