The peak of the global financial crisis and Great Recession witnessed the largest fall in international trade since the Great Depression, as imports and exports contracted by nearly 30 percent relative to GDP. The blue bars in Figure 1 show this drop for groups of countries during the peak of the crisis, between October 2008 and January 2009. The collapse of trade in those months is astonishing when compared with the decline during other recessions.
Several factors are responsible for the plunge; a 2010 article in The Regional Economist discussed the likely culprits but concluded at that time that there was no one smoking gun. Today, there is some consensus among economists that demand for intermediate goods (such as machinery parts and food ingredients) and durable goods (such as cars and appliances) played a large role; purchases of these goods are relatively easy to postpone by households and firms during tough times. Research by economists Jonathan Eaton, Samuel Kortum, Brent Neiman and John Romalis attributes more than 70 percent of the decline in trade during the Great Recession to the large drop in demand and, particularly, to the collapse of expenditures on durable goods. This leaves room for other factors to explain the remaining 30 percent, and many economists agree that this share is explained, at least in part, by the collapse of trade finance during the crisis.
Why Do Exporters Need Trade Finance? What Is It?
Most firms rely on external capital (as opposed to their own capital, internal cash flows and reinvested earnings) to finance fixed costs—such as research and development, advertising, fixed capital equipment—and also to finance intermediate input purchases, inventories, payments to workers and other frequent costs before sales and payments of their output take place.
As explained by economists Davin Chor and Kalina Manova, export activities entail extra upfront expenditures that may force firms to rely on external finance. Extra money may be needed, for example, to research the profitability of new export markets; to make market-specific investments in capacity, product customization and regulatory compliance; and to set up and maintain foreign distribution networks.
Exporting activities may also generate additional variable trade costs due to shipping, duties and freight insurance, some of which are incurred before export revenue is realized. In addition, cross-border delivery can take longer to complete than domestic orders, increasing the need for working capital requirements relative to those of firms that sell only domestically. For example, ocean transit shipping times can be as long as several weeks, during which the exporting firm typically would be waiting for payment.
31. Reducing fertility rates Â Family planning programs. Women in developing countries are having fewer children Â from six births per woman in the 1960s to 3.5 today. In the 1960s, only 10% of the world's families were using effective methods of family planning. The number now stands at 55 percent.
32. Fighting drug abuse ÂReduce demand for illicit drugs, suppress drug trafficking, and has helped farmers to reduce their economic reliance on growing narcotic crops by shifting farm production toward other dependable sources of income.
33. Improving global trade relations Â The UN Conference on Trade and Development (UNCTAD) has worked to obtain special trade preferences for developing countries to export their products to developed countries with fair prices