Trade, Finance, and the Global Recession

Joseph Francois, Julia Woerz, 2 May 2009

Is the current collapse in trade unprecedented, inconsistent with the general level of economic downturn, and indicative of a trade-related set of problems calling for trade-specific solutions? This column, by carefully comparing real and nominal trade trends, finds that trade seems to be a victim of non-trade weaknesses in credit and demand. While we should maintain a rearguard action on the protectionism front, the cure for the symptoms lies in curing the underlying illness.

Recent trends in trade have invited a mix of consternation and hyperbole in the business and economics press and blogosphere alike. Discussion has ranged from worries about export credit shortfalls to resurgent protectionism. The focus has been on finding the cause, and some have assumed that the collapse in trade is unprecedented, inconsistent with the general level of economic downturn, and indicative of a trade-related set of problems calling for trade-specific solutions. There are indeed important public policy questions here. Is this recession being confounded by a set of trade-specific problems and issues? If so, how big is the effect and should we be worried?

In confronting these questions, we need to be careful when comparing real and nominal changes in trade. The last 12 months have seen a dramatic drop in commodity prices, so that real and nominal trade data can tell a very different story. In addition, because the importance of various sectors in trade varies from their importance in GDP and also varies considerably across countries, we also need to pay close attention to how we deflate trade flows to control for falling prices across a range of commodities. We also need to examine what is happening to domestic production before deciding we have a mismatch between trade and GDP trends.

Global trade plummeted in the last months of 2008. Indeed, world trade volumes fell 14% from December 2008 to February 2009. (This is somewhat better than the November-January drop of 18%, in part reflecting a 0.8% rise in February.) In the three months ending in February, Japanese exports were down 29%. EU15 exports were up 0.3% in February over January levels, after falling 2.3% in December and 5.3% in January (CPB World Trade Monitor, 21 April 2009). The projections for the full year 2009 offer little comfort. The WTO has forecast a 9% decline in global export volumes for 2009.

When digesting this information, the arcane question of appropriate price deflators is important. Real trade figures can vary substantially according to the underlying price indices used to deflate the data. The recent, highly cited WTO figures rely on world GDP prices, but there are problems with this approach.