The Collapse of Global Trade during Global Financial Crisis of 2008-2009

The Collapse of Global Trade during Global Financial Crisis of 2008-2009

There are three broad categories of global Trade.

  • Trade in Commodities
  • Trade in Manufactured Goods
  • Trade in Services

During the Financial Crisis, Trade in commodities declined due to increase in Prices.

Trade in Services were largely unaffected.

Trade in Manufactured goods declined sharply for variety of reasons not yet entirely clear.

 

Potential Causes for decline

  • Fall in Aggregate Demand of goods
  • Constrained Trade Finance
  • Increase in Trade Barriers
  • Impact of Global Value Chains

 

From GLOBAL VALUE CHAINS IN A POSTCRISIS WORLD A DEVELOPMENT PERSPECTIVE

The global economic crisis of 2008–09 has revealed the interdependence of the world economy. The financial crisis originated in the United States, but the resulting economic downturn quickly spread to the rest of the world. Trade, along with finance, was one of the main vectors of transmission of the crisis. In 2009, there was a massive contraction in global trade—minus 13 percent. The contraction was largely a reflection of a drop in demand, especially for durable goods. The fact that the shock was transmitted very rapidly reflects the increasing reliance by businesses on so-called global value chains (GVCs)—the process of ever-finer specialization and geographic fragmentation of production, with the more labor-intensive parts of the production process transferred to developing countries. In a world where GVCs are the prevalent business model for multinational corporations, a reduction in demand for final products by global buyers implies that demand shocks are immediately transmitted “upstream” to subcontractors in developing countries.

 

From Resilient to the crisis? Global supply chains and trade flows

According to the most recent IMF estimates (IMF 2009), the ongoing recovery will drive a wedge between output and trade. Output is supposed to shrink by ‘only’ 1.1% at the end of 2009 (-3.4% in advanced economies), but world trade is forecast to still experience a drop of -11.9%. While other estimates put the latter figure at –9% (WTO, World Bank), it is indisputable that during 2009 official figures recording trade flows will fall much more than GDP.

Apart from its magnitude, the fall in trade in 2009 has also been quite homogeneous across all countries (more than 90% of OECD countries have exhibited simultaneously a decline in exports and imports exceeding 10%, as noted by Araujo and Olivera Martins 2009). This fall has also been very fast, with trade virtually grinding to a halt in the last month of 2008.1 These facts led Baldwin and Evenett (2009) to qualify the drop in trade during the crisis as “severe, sudden and synchronised”.

A number of transmission mechanisms have recently been proposed to account for these three attributes of the contraction of trade flows, many of which impinge upon the role that global supply chains might have played in exacerbating the drop in global demand.

The basic argument is that in a world characterised increasingly by vertical specialisation, goods are produced sequentially in stages across different countries – so-called international supply chains. The constituent parts and components of a final good crosses borders several times before the final product reaches the consumer; at each border crossing, the full value of the partially assembled good is recorded as trade. As a result, for a given reduction in world income, trade should decline “not only by the value of the finished product, but also by the value of all the intermediate trade flows that went into creating it”.

This implies that the extensive presence of supply chains does not automatically explain why world trade overshot the world GDP drop; other explanatory factors are needed. These may include:

  • The collapse in internal demand and production, affecting current and future level of (tradable) inventories worldwide;
  • Fiscal stimulus plans with a relatively stronger support of non-tradable sectors, like construction and infrastructures (Bénassy-Quéré et al. 2009);
  • The rise of ‘murky’ protectionism; and
  • The problems of trade finance with financial spreads still well-above ‘normal’ (i.e. pre-crisis) market rates (Auboin, 2009).

Do the above arguments mean that global supply chains are totally neutral as a transmission mechanism of the crisis from GDP to trade? Of course not. In all likelihood, however, the channels are much more complex than originally thought, and entail important compositional effects.

For the sake of argument, let us take the following story based on the idea that a relatively large part of the overreaction of trade has been caused by the sudden drying up of liquidity in trade finance. Auboin (2009) notes that, in the second part of 2008, spreads on short-term trade credit facilities suddenly soared to between 300 to 600 basis points above LIBOR, compared to 10 to 20 basis points in normal times, leading to a virtual freeze of important trade deals throughout the globe, with supply chain operations being disrupted by lack of financing, especially for developing country suppliers.

Under this assumption we would have a scenario in which the liquidity channel has led trade to overshoot the fall in demand, with the effect being larger within supply chains, as the trade financing of these operations is typically managed by large international financial institutions, particularly hit by the crisis.3

In this scenario, we would still obtain a severe, sudden and synchronised drop in trade flows, with the effects correlated with (but not caused by) the behaviour of global supply chains.

Moreover, under the same scenario, we would also observe that, during the crisis,trade falls more along the intensive margin (i.e. value per trade) than the extensive margins (i.e. number of traders). The reason being that, if the overreaction of trade was caused relatively more by liquidity constraints than by a disruption of supply chains, the above effects would lead to a reduction in the volume of trade, but not necessarily to a similar reduction in the number of traders worldwide.

This is exactly what Bricongne et al. (2009) find in a paper analysing the behaviour of French exporters during the crisis. Relying on monthly data for individual French exporters observed until April 2009, the authors find that the drop in French exports is mainly due to the intensive margin of large exporters, with small and large firms evenly affected once sectoral and geographical specialisation are controlled for. Interestingly, they also find that firms (small and large) in sectors more dependent on external finance are the most affected by the crisis.

While any conclusion must wait for more data to become available, there are good reasons to believe that the rise of global supply chains has not necessarily been the main cause of the recent “severe, sudden and synchronised” fall in global trade flows. Based on the available evidence, one may even be tempted to conclude that, under certain circumstances, international networks of production may also display some degree of ‘resilience’ to adverse shocks like the current crisis: supply-chain-related trade flows may react later (rather than sooner) to an adverse shock. Their fall may be smaller and, eventually, their recovery may happen faster relative to overall trade flows.

The observed resilience of supply chains may arise from some intrinsic attribute of production chains, as argued above. Alternatively, it may be the outcome of the political economy. Fearing that a collapse of supply chains would set off a sudden process of de-globalisation and implosion of international trade, governments may intervene in favour of supply chains. For example, the massive bail-outs of large financial institutions have helped their best customers, among them the big players within supply chains. Finally, of course, this indirect support of supply chains may have also been an unintended consequence of financial bailouts implemented for very different reasons.

 

From UNCTAD Global Value Chains: Investment and Trade for Development

gvc

 

Key Terms

  • BLS ( Bureau of Labor Statistics)
  • UNCTAD ( United Nations Conference on Trade and Development)
  • NIPAs ( National Income and Product Accounts)
  • OECD ( Organization for Economic Cooperation and Development)
  • EBRD (European Bank for Reconstruction and Development)
  • WTO (world Trade Organization)
  • GATT (General Agreement on Trade and Tariffs)
  • ILO (International Labor Organization)
  • ADB (Asian Development Bank)
  • UNIDO ( United Nations Industrial Development Organization)
  • BEA ( Bureau of Economic Analysis)
  • Production Networks
  • Vertical Specialization
  • Production Fragmentation
  • Intermediate Goods
  • Network Linkages
  • Global Supply Chains
  • Global Value Chains (GVCs)
  • Production Sharing
  • Inter Industry Input Output Tables
  • Inter Country Input Output Tables
  • Global Networks
  • Multi National Companies ( MNCs)
  • Regional Economic Integration
  • Trade Globalization
  • Trade in Goods and Services
  • Trade in Value Added (TIVA)
  • World Input Output Database (WIOD)
  • OECD-WTO TIVA Database
  • UNCTAD-EORA GVC Database
  • Global Trade Analysis Project (GTAP) Database
  • Institute of Developing Economies (IDE-JETRO) Asian IO Tables
  • World Input Output Network (WION)
  • Global Multi Regional Input Output (GMRIO) Framework
  • EXIOBASE/EXIOPOL EXIOBASE is a global, detailed Multi-regional Environmentally Extended Supply and Use / Input Output (MR EE SUT/IOT) database.

 

 

Key Sources of Research:

 

The Global Trade Slowdown: Cyclical or Structural?

Cristina Constantinescu, Aaditya Mattoo, and Michele Ruta

2015

https://www.imf.org/external/pubs/ft/wp/2015/wp1506.pdf

 

 

The future of global trade: Where are we heading and should we be concerned?

Gaaitzen de Vries
Bart Los
Robert Stehrer
Marcel Timmer

2016

https://www.weforum.org/agenda/2016/11/the-future-of-global-trade-where-are-we-heading

 

 

Demand Spillovers and the Collapse of Trade in the Global Recession

Rudolfs Bems Robert C. Johnson

Kei-Mu Yi

2010

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.186.7680&rep=rep1&type=pdf

 

 

Vertical Linkages and the Collapse of Global Trade

Rudolfs Bems
Robert C. Johnson
Kei-Mu Yi

AMERICAN ECONOMIC REVIEW
VOL. 101, NO. 3, MAY 2011

https://pdfs.semanticscholar.org/a8ab/600661c5f17781a38ca3168026b8663b8ebb.pdf

 

 

The Role of Vertical Linkages in the Propagation of the Global Downturn of 2008

Rudolfs Bems Robert C. Johnson

Kei-Mu Yi

2010

 

https://pdfs.semanticscholar.org/5519/0e43be03f9da1c48a385b94fbcc4904a3fb0.pdf

 

 

The Great Trade Collapse

Rudolfs Bems, Robert C. Johnson and Kei-Mu Yi

Annual Review of Economics
Vol.5:1-549 (Volume publication date August 2013)

 

 

GLOBAL VALUE CHAINS DURING THE GREAT TRADE COLLAPSE

A BULLWHIP EFFECT?

by Carlo Altomonte, Filippo Di Mauro, Gianmarco Ottaviano, Armando Rungi and Vincent Vicard

2012

 

http://www.suomenpankki.fi/pdf/169822.pdf

 

 

The bullwhip effect and the Great Trade Collapse

Veronika Zavacka

 

http://www.ebrd.com/downloads/research/economics/workingpapers/wp0148.pdf

 

 

Trade Finance and the Great Trade Collapse

By JaeBin Ahn, Mary Amiti, and David E. Weinstein

2011

 

http://www.columbia.edu/~dew35/Ahn-Amiti-WeinsteinAERPP.pdf

 

 

Economic Crisis and Global Supply Chains 

Agnès Bénassy-Quéré, Yvan Decreux, Lionel Fontagné & David Khoudour-Casteras

http://www.cepii.fr/PDF_PUB/wp/2009/wp2009-15.pdf

 

 

 

The Financial Crisis and Global Supply Chains

 

Robert N. Mefford, University of San Francisco, USA

http://repository.usfca.edu/cgi/viewcontent.cgi?article=1010&context=fe

 

 

International Supply Chains and Trade Elasticity in Times of Global Crisis

https://www.wto.org/english/res_e/reser_e/ersd201008_e.pdf

 

 

GLOBAL SUPPLY CHAINS: TRADE AND ECONOMIC POLICIES FOR DEVELOPING COUNTRIES

Alessandro Nicita Victor Ognivtsev Miho Shirotori

 

http://unctad.org/en/PublicationsLibrary/itcdtab56_en.pdf

 

 

The Great Trade Collapse: Shock Amplifiers and Absorbers in Global Value Chains

Zhengqi Pan

June 2016

 

http://gpn.nus.edu.sg/file/Zhengqi%20Pan_GPN2016_008.pdf

 

 

The Age of Global Value Chains: Maps and Policy Issues

 

https://www.esri.ie/pubs/JACB201530.pdf

 

 

Asia and Global Production Networks Implications for Trade, Incomes and Economic Vulnerability

 

https://www.adb.org/sites/default/files/publication/149221/asia-and-global-production-networks.pdf

 

 

Mapping globaL Value Chains

Koen De Backer and Sébastien Miroudot

2014

https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1677.pdf

 

 

Mapping Global Value Chains:

Intermediate Goods Trade and Structural Change in the World Economy

Timothy J. Sturgeon

Olga Memedovic

2011

 

http://www.unido.org//fileadmin/user_media/Publications/Research_and_statistics/Branch_publications/Research_and_Policy/Files/Working_Papers/2010/WP%2005%20Mapping%20Glocal%20Value%20Chains.pdf

 

 

 

World Investment Report 2013:

Global Value Chains: Investment and Trade for Development

2013

 

http://unctad.org/en/PublicationsLibrary/wir2013_en.pdf

 

 

Trade finance: developments and issues

Report submitted by a Study Group established by the Committee on the Global Financial System

The Group was chaired by John J Clark, Federal Reserve Bank of New York

January 2014

 

http://www.bis.org/publ/cgfs50.pdf

 

 

East Asian Value Chains and the Global Financial Crisis

Genet Zinabou

2010

http://publications.gc.ca/collections/collection_2010/maeci-dfait/FR4-14-8-2010-eng.pdf

 

 

The collapse of global trade, murky protectionism, Recommendations for the G20

and the crisis

 

Edited by: Richard Baldwin and Simon Evenett

2009

http://www.felixpena.com.ar/contenido/negociaciones/anexos/2009-03-murky-protectionism.pdf

 

 

Production Sharing in East Asia: Who Does What for Whom and Why?

 

Francis Ng and Alexander Yeats

1999

 

http://documents.worldbank.org/curated/en/380281468771676867/102502322_20041117140004/additional/multi-page.pdf

 

 

PRODUCTION SHARING IN EAST ASIA: CHINA’S POSITION, TRADE PATTERN AND TECHNOLOGY UPGRADING

Laike Yang

 

http://unctad.org/en/PublicationChapters/gdsmdp20152yang_en.pdf

 

 

GLOBAL VALUE CHAINS SURVEYING DRIVERS AND MEASURES

João Amador and Sónia Cabral

2014

 

https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1739.en.pdf

 

 

A New Measurement for International Fragmentation of the Production Process: An International Input-Output Approach

Satoshi Inomata

October 2008

 

http://www.ide.go.jp/English/Publish/Download/Dp/pdf/175.pdf

 

 

GLOBAL VALUE CHAINS IN A POSTCRISIS WORLD

A DEVELOPMENT PERSPECTIVE

Olivier Cattaneo, Gary Gereffi, and Cornelia Staritz Editors

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.364.8729&rep=rep1&type=pdf#page=97

 

 

THE NATURE AND GROWTH OF VERTICAL SPECIALIZATION IN WORLD TRADE

David Hummels Jun Ishii Kei-Mu Yi

March 1999

 

https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr72.pdf

 

 

TRADE INTEGRATION IN EAST ASIA:
THE ROLE OF CHINA AND PRODUCTION NETWORKS

MONA HADDAD

2007

http://documents.worldbank.org/curated/en/934051468236684868/pdf/wps4160.pdf

 

 

Production Networks and Trade Patterns in East Asia: Regionalization or Globalization?

Prema-chandra Athukorala

No. 56 | August 2010

https://www.adb.org/sites/default/files/publication/28530/wp56-trade-patterns-east-asia.pdf

 

 

Trade Integration and Production Network in East Asia

Pornnapa Leelapornchai

August 2007

 

https://www.jcer.or.jp/eng/pdf/Pornnapa.pdf

 

 

Trade patterns and global value chains in East Asia:
From trade in goods to trade in tasks

 

https://www.wto.org/english/res_e/booksp_e/stat_tradepat_globvalchains_e.pdf

 

 

Global production sharing and trade patterns in East Asia

Prema-chandra Athukorala

June 2013

http://www.waseda.jp/gsaps/eaui/educational_program/PDF_2/TU_VIROT,%20Ali_Reading2_Global%20Production%20Sharing%20and%20Trade%20Patterns%20in%20East%20Asia.pdf

 

 

Global Production Networks in Electronics and Intra-Asian Trade

Byron Gangnes

Ari Van Assche

2010

 

http://www.uhero.hawaii.edu/assets/WP_2010-4.pdf

 

 

The Role of China, Japan, and Korea in Machinery Production Networks

Ayako OBASHI†

Fukunari KIMURA

March 2016

 

http://www.eria.org/ERIA-DP-2016-10.pdf

 

 

China’s evolving role in global production networks: the decoupling debate revisited

Prema-chandra Athukorala

John Ravenhill

 

https://acde.crawford.anu.edu.au/sites/default/files/publication/acde_crawford_anu_edu_au/2016-07/2016-12_athukorala_ravenhill_wp_june_2016.pdf

 

 

International Production Networks And Changing Trade Patterns In East Asia: The Case Of The Electronics Industry

Dieter Ernst & Paolo Guerrieri

May 1997

http://www3.druid.dk/wp/19970007.pdf

 

 

UNDERSTANDING THE WORLD TRADE COLLAPSE

Calista Cheung and Stéphanie Guichard

2009

http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?doclanguage=en&cote=eco/wkp(2009)70

 

 

GLOBAL TRADE: WHAT’S BEHIND THE SLOWDOWN?

IMF World Economic Outlook Report October 2016

 

https://www.imf.org/external/pubs/ft/weo/2016/02/pdf/c2.pdf

 

 

A Theory of Domestic and International Trade Finance

JaeBin Ahn

2011

https://www.researchgate.net/profile/Jaebin_Ahn/publication/228202593_A_Theory_of_Domestic_and_International_Trade_Finance/links/0c96052274d4abea86000000.pdf

 

 

The Great Trade Collapse: Causes, Consequences and Prospects

 

Edited by Richard Baldwin

2009

 

http://lionel.fontagne.free.fr/papers/great_trade_collapse.pdf

 

 

Understanding the Weakness in World Trade

2015

 

https://www.ecb.europa.eu/pub/pdf/other/eb201503_article01.en.pdf

 

 

The mystery of the missing world trade growth after the global financial crisis

Hanna armelius, Carl-JoHan Belfrage and Hanna stenBaCka

2014

 

http://www.riksbank.se/Documents/Rapporter/POV/2014/2014_3/rap_pov_artikel_1_141121_eng.pdf

 

 

Resilient to the crisis? Global supply chains and trade flows

Carlo Altomonte, Gianmarco Ottaviano

27 November 2009

http://voxeu.org/article/resilient-crisis-global-supply-chains-and-trade-flows

 

 

The great trade collapse: What caused it and what does it mean?

Richard Baldwin

27 November 2009

 

 

The Collapse of International Trade During the 2008-2009 Crisis: In Search of the Smoking Gun

Andrei A. Levchenko

Logan T. Lewis

Linda L. Tesar

2009

 

 

Off the Clif  and Back? Credit Conditions and International Trade during the Global Financial Crisis

Davin Chory

Kalina Manova

This version: December 2009

 

 

WHY THE WORLD SUDDENLY CARES ABOUT GLOBAL SUPPLY CHAINS

GARY GEREFFI AND JOONKOO LEE

2012

 

 

China’s Slowdown: The First Stage of the Bullwhip Effect

Yossi Sheffi

September 09, 2015

 

 

Financial Crisis and Supply-Chain Financing

Leora Klapper and Douglas Randall

 

 

The mystery of the missing world trade growth after the global financial crisis

Hanna Armelius, Carl-Johan Belfrage and Hanna Stenbacka

2014

 

 

Trade Collapse, Trade Relapse and Global Production Networks: Supply Chains in the Great Recession

Escaith, Hubert

OECD, DEFI, WTO

28. October 2009

 

 

SPIDERS AND SNAKES: OFFSHORING AND AGGLOMERATION IN THE GLOBAL ECONOMY

Richard Baldwin Anthony Venables

Working Paper 16611

2010

 

 

 

GLOBAL VALUE CHAINS IN A POSTCRISIS WORLD A DEVELOPMENT PERSPECTIVE

Olivier Cattaneo, Gary Gereffi, and Cornelia Staritz

2010

 

 

Accounting relations in bilateral value added trade

Robert Stehrer

2013

 

http://www.wiod.org/publications/papers/wiod14.pdf

 

 

NETWORKS OF VALUE ADDED TRADE

Working Papers 2015

João Amador | Sónia Cabral

 

 

Trade patterns and global value chains in East Asia: From trade in goods to trade in tasks

WTO Report

 

 

Counting borders in global value chains

Kirill Muradov:

May 2016

 

 

Using Average Propagation Lengths to Identify Production Chains in the Andalusian Economy

ERIK DIETZENBACHER*, ISIDORO ROMERO LUNA** AND NIELS S. BOSMA

2005

https://idus.us.es/xmlui/bitstream/handle/11441/17372/file_1.pdf?sequence=1

 

 

Trade in Value Added: An East Asian Perspective

Satoshi Inomata

No. 451 December 2013

 

https://www.adb.org/sites/default/files/publication/156306/adbi-wp451.pdf

 

 

TRADE INTERCONNECTEDNESS: THE WORLD WITH GLOBAL VALUE CHAINS

2013

 

 

The globalisation of inflation: the growing importance of global value chains

by Raphael Auer, Claudio Borio and Andrew Filardo

 

 

 

 

GLOBAL MULTIREGIONAL INPUT–OUTPUT FRAMEWORKS: AN INTRODUCTION AND OUTLOOK

Arnold Tukker a b & Erik Dietzenbacher

2013

http://unstats.un.org/unsd/trade/events/2014/mexico/documents/session6/UNSD%20-%20Tukker%20-%20Overview%20on%20International%20IO%20Tables%20-%202013.pdf

 

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Author: Mayank Chaturvedi

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