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
- 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
The future of global trade: Where are we heading and should we be concerned?
Gaaitzen de Vries
Demand Spillovers and the Collapse of Trade in the Global Recession
Rudolfs Bems Robert C. Johnson
Vertical Linkages and the Collapse of Global Trade
Robert C. Johnson
AMERICAN ECONOMIC REVIEW
VOL. 101, NO. 3, MAY 2011
The Role of Vertical Linkages in the Propagation of the Global Downturn of 2008
Rudolfs Bems Robert C. Johnson
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
The bullwhip effect and the Great Trade Collapse
Trade Finance and the Great Trade Collapse
By JaeBin Ahn, Mary Amiti, and David E. Weinstein
The Financial Crisis and Global Supply Chains
Robert N. Mefford, University of San Francisco, USA
International Supply Chains and Trade Elasticity in Times of Global Crisis
GLOBAL SUPPLY CHAINS: TRADE AND ECONOMIC POLICIES FOR DEVELOPING COUNTRIES
Alessandro Nicita Victor Ognivtsev Miho Shirotori
The Great Trade Collapse: Shock Amplifiers and Absorbers in Global Value Chains
The Age of Global Value Chains: Maps and Policy Issues
Asia and Global Production Networks Implications for Trade, Incomes and Economic Vulnerability
Mapping globaL Value Chains
Koen De Backer and Sébastien Miroudot
Mapping Global Value Chains:
Intermediate Goods Trade and Structural Change in the World Economy
Timothy J. Sturgeon
World Investment Report 2013:
Global Value Chains: Investment and Trade for Development
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
East Asian Value Chains and the Global Financial Crisis
The collapse of global trade, murky protectionism, Recommendations for the G20
and the crisis
Edited by: Richard Baldwin and Simon Evenett
Production Sharing in East Asia: Who Does What for Whom and Why?
Francis Ng and Alexander Yeats
PRODUCTION SHARING IN EAST ASIA: CHINA’S POSITION, TRADE PATTERN AND TECHNOLOGY UPGRADING
GLOBAL VALUE CHAINS SURVEYING DRIVERS AND MEASURES
João Amador and Sónia Cabral
A New Measurement for International Fragmentation of the Production Process: An International Input-Output Approach
GLOBAL VALUE CHAINS IN A POSTCRISIS WORLD
A DEVELOPMENT PERSPECTIVE
Olivier Cattaneo, Gary Gereffi, and Cornelia Staritz Editors
THE NATURE AND GROWTH OF VERTICAL SPECIALIZATION IN WORLD TRADE
David Hummels Jun Ishii Kei-Mu Yi
TRADE INTEGRATION IN EAST ASIA:
THE ROLE OF CHINA AND PRODUCTION NETWORKS
Production Networks and Trade Patterns in East Asia: Regionalization or Globalization?
No. 56 | August 2010
Trade Integration and Production Network in East Asia
Trade patterns and global value chains in East Asia:
From trade in goods to trade in tasks
Global production sharing and trade patterns in East Asia
Global Production Networks in Electronics and Intra-Asian Trade
Ari Van Assche
The Role of China, Japan, and Korea in Machinery Production Networks
China’s evolving role in global production networks: the decoupling debate revisited
International Production Networks And Changing Trade Patterns In East Asia: The Case Of The Electronics Industry
Dieter Ernst & Paolo Guerrieri
UNDERSTANDING THE WORLD TRADE COLLAPSE
Calista Cheung and Stéphanie Guichard
GLOBAL TRADE: WHAT’S BEHIND THE SLOWDOWN?
IMF World Economic Outlook Report October 2016
A Theory of Domestic and International Trade Finance
The Great Trade Collapse: Causes, Consequences and Prospects
Edited by Richard Baldwin
Understanding the Weakness in World Trade
The mystery of the missing world trade growth after the global financial crisis
Hanna armelius, Carl-JoHan Belfrage and Hanna stenBaCka
Resilient to the crisis? Global supply chains and trade flows
Carlo Altomonte, Gianmarco Ottaviano
27 November 2009
The great trade collapse: What caused it and what does it mean?
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
Off the Clif and Back? Credit Conditions and International Trade during the Global Financial Crisis
This version: December 2009
WHY THE WORLD SUDDENLY CARES ABOUT GLOBAL SUPPLY CHAINS
GARY GEREFFI AND JOONKOO LEE
China’s Slowdown: The First Stage of the Bullwhip Effect
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
Trade Collapse, Trade Relapse and Global Production Networks: Supply Chains in the Great Recession
OECD, DEFI, WTO
28. October 2009
SPIDERS AND SNAKES: OFFSHORING AND AGGLOMERATION IN THE GLOBAL ECONOMY
Richard Baldwin Anthony Venables
Working Paper 16611
GLOBAL VALUE CHAINS IN A POSTCRISIS WORLD A DEVELOPMENT PERSPECTIVE
Olivier Cattaneo, Gary Gereffi, and Cornelia Staritz
Accounting relations in bilateral value added trade
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
Counting borders in global value chains
Using Average Propagation Lengths to Identify Production Chains in the Andalusian Economy
ERIK DIETZENBACHER*, ISIDORO ROMERO LUNA** AND NIELS S. BOSMA
Trade in Value Added: An East Asian Perspective
No. 451 December 2013
TRADE INTERCONNECTEDNESS: THE WORLD WITH GLOBAL VALUE CHAINS
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