The crisis that, after several months of gestation in the US financial sphere, irrupted into the international scene in September 2008 has been dubbed the "Great Trade Collapse" for its impact on international commerce. The shock, emanating from the largest world financial centre, spread very quickly and almost simultaneously to most industrial and emerging countries. The collapse of world trade has been unprecedented, even in comparison with the Great Depression of the 1930s (Eichengreen and O’Rourke, 2009). During the first quarter of 2009, world exports in value terms were 31 percent lower than one year before and world imports 30 percent lower. Also significant is the fact that freight rates for containers shipped from Asia to Europe have reached zero in the middle
of January 2009 for the first time in history.
International trade, which dropped five times more rapidly than global GDP, was both a casualty of the 2008-2009 crisis and one of its main channels of transmission. While a decrease in trade is expected when world output falls following a severe financial crisis, the magnitude of the collapse has surprised observers. This overreaction is reflected in high trade elasticities. Moreover, the trade collapse was not only sudden and severe, but also synchronized, which is another distinguishing feature of the current crisis.
One prominent and often discussed new element in world production is the emergence of global supply chains. The recent phase of globalization, to be identified with the emblematic 1989 year, saw the emergence of new business models that built on new opportunities to develop comparative advantages (Krugman, 1995; Baldwin, 2006).1 With the opening of new markets, the technical revolution in IT and communications, and the closer harmonization of economic models worldwide, trade became much more than just a simple exchange of merchandise across borders. It developed into a constant flow of investment, of technologies and technicians, of goods for processing and business services, in what has been called the "Global Supply Chain".
While providing renewed opportunities for increasing productivity and promoting industrialization in developing countries, the greater industrial interconnection of the global economy has created newer and faster channels for the propagation of adverse external shocks. Referring to the breakdown of 2008-2009, some authors have pointed out that they may explain the abrupt decrease in trade or the synchronization of the trade collapse. The question is of importance for its economic and financial implications, but also for its social impact as the reorganization of global supply chains implies the destruction and creation of jobs at different locations.
But has the impressive collapse in world trade really been caused by global supply chains? If the answer is yes, we should expect a deeper decrease of trade in those countries and sectors that participate in global production networks and a smoother reaction in those that produce mainly for the domestic market.
Moreover, we should also expect that global supply chains play a role in the synchronization of the trade collapse and its size. One reason for this is the inherent magnification effect of global production networks: intermediate inputs cross the border several times before the final product is shipped to the final costumer. All the different production stages of the global supply chain rely on each other – as suppliers and as customers. Thus, if a shock occurs in one of the participating sectors or countries, the shock is transmitted quickly to the other stages of the supply chain through both backward and forward linkages. These transmission channels apply both to financial shocks, e.g. a credit crunch in one country, and to trade policy shocks, e.g. rising tariffs and non-tariff barriers, or implementing "buying local” campaigns.
Another explanation of why trade has been affected harder than GDP is the composition effect. Trade flows are composed mainly of durable goods (about two thirds or more), while GDP consists mainly of services. Trade in goods was strongly impacted by the crisis while services showed some resilience to the crisis (Borchert and Mattoo, 2009). Lastly, there is an accounting bias, as GDP is measured as value-added and trade in gross values.
The paper investigates the role of global supply chains in explaining the trade collapse of 2008-2009 and the long-term variations observed in trade elasticity. Building on the empirical results obtained from a subset of input-output matrices and the exploratory analysis of a large and diversified sample of countries, a formal model is specified to measure the respective short-term and long-term dynamics of trade elasticity. The model is then used to formally probe the role of vertical integration in explaining changes in trade elasticity. Aggregated results on long-term trade elasticity tend to support the hypothesis that world economy has undertaken in the late 1980s a "traverse" between two underlying economic models. During this transition, the expansion of international supply chains determined an apparent increase in trade elasticity. Two supply chains related effects (the composition and the bullwhip effects) explain also the overshooting of trade elasticity that occurred during the 2008-2009 trade collapse. But vertical specialization is unable to explain the heterogeneity observed on a country and sectoral level, indicating that other contributive factors may also have been at work to explain the diversity of the observed results.
To read the report in full, visit
http://www.wto.org/english/res_e/reser_e/ersd201008_e.pdf 1 1989 is known for the fall of the Berlin Wall, which brought down the barriers that had split the post-
WWII world; it should also be reminded for the Brady Bonds, which put an end to the decade-long debt crisis
that plagued many developing countries. In continuation, the 1990s saw the conclusion of the Uruguay Round and the birth of the WTO, which brought down many trade barriers and led to further liberalization in areas like telecommunications, financial services and information technologies.
World Trade Organization
balkans.com
Source: newsroom - meattradenewsdaily.co.uk
Back to News Headlines