From VoxEU: The Great Trade Collapse

Causes, Consequences and Prospects, edited by Richard Baldwin

From Baldwin’s introductory chapter:

World trade experienced a sudden, severe and synchronised collapse in late 2008 — the
sharpest in recorded history and deepest since WWII. This Ebook — written for the world’s
trade ministers gathering for the WTO’s Trade Ministerial in Geneva — presents the economics profession’s received wisdom on the collapse….

…Two dozen chapters, written by leading
economists from across the planet, summarise the latest research on the causes of the collapse as well as the consequences and prospects for recovery. According to the emerging consensus, the collapse was caused by the sudden, recession-induced postponement of purchases, especially of durable consumer and investment goods (and their parts and components). This was amplified by “compositional” and “synchronicity” effects in which international supply chains played a central role.


Source: R. Baldwin, “The Great Trade Collapse” (2009).

This is an excellent collection, essential reading for all interested in understanding the reasons for the decline in trade flows, and the implications for a resurgence in trade. Many of the questions raised in this May post on the trade collapse (trade credit crunch vs. vertical specialization vs. de-stocking) are answered to varying degrees in the various articles.

For a taste of what will be in our forthcoming book on the causes and implications of the financial and economic crisis, see Jeffry Frieden‘s chapter, which assesses the prospects for “Global trade in the aftermath of the global crisis”. (Simon Evenett has an interesting round-up on protectionist trade measures thus far.)

The ebook is available here.

8 thoughts on “From VoxEU: The Great Trade Collapse

  1. ppcm

    Whilst vertical specialization may be hard to integrate in the cause and effects of the simultaneous slump in export and import which took place,,thoughts should be given to the improved efficiency of advanced manufacturing and advanced manufacturing orders.Thoughts may as well be directed to Asia intra trade where the vertical integration is reality,
    Would the chemical (specialized products) be a leading indicator in downwards and up cycles, as they were the first ones to show demand attrition?

  2. RicardoZ

    It is appropriate that the first article is by Fred Bergsten since he was part of the problem.
    As you read through this ebook ask yourself, “What is the difference from what these people are recommending and what the Bush administration did to create this mess?” Then if you can come to grips with the fact that failures of the Bush administration are a done deal and that now all we can do is try to correct the mess ask yourself, “What is the difference between what the Obama administration is doing and what the Bush administration did?”
    If we do not break with the failed mercantilist theories that have been discredited over and over we are destined to repeat the economic declines that follow them.
    There are those out there who are writing books and articles that will actually solve the problem. Seek them out and promote them. That is the only way we will ever break away from this ill wind blowing out of Washington DC.

  3. Cedric Regula

    To sell your BRIC securities, or not to sell your BRIC securities, that is the question.
    Haven’t heard many peeps about global de-coupling lately. Has that theory been tossed out the window? When will Wall Street stop believing?
    Clearly we need ZIRP combined with a Cash for Chinese program to get us out of the doldrums here.

  4. jeffrey Goodrich

    I’m no economist, but this is pure drivel: “…the [trade] collapse was caused by the sudden, recession-induced postponement of purchases…” This is nothing but a tautology, to wit: the sudden collapse of trade was caused by the sudden collapse of trade.
    A much more direct inquiry, and one which I suspect none of these economists has addressed, is what caused people to postpone their purchases in the first place? Answer: the withdrawal of credit from a worldwide economic system that grew dependent upon cheap credit created by a witches brew of artificially low rates, fraudulent syndication markets and a mass-media created belief that ordinary people can borrow their way to wealth. When it became apparent to all in 2008 that perhaps a majority of loans were supported only by the rules of a Ponzi credit system (i.e., repayable only if some other creditor could be found to refinance the debt), the system for creating new credit collapsed just like every Ponzi scheme eventually does. Because this system will not be restored in our lifetime and because consumer demand was dependent upon the availability of such Ponzi finance, demand cannot possibly return until prices fall to a level of equilibrium supported by non-Ponzi credit.

  5. Footwedge

    “Because this system will not be restored in our lifetime and because consumer demand was dependent upon the availability of such Ponzi finance, demand cannot possibly return until prices fall to a level of equilibrium supported by non-Ponzi credit.”
    From one non-economist to another I say amen, Jeffrey, amen. Is reality such a horrible place?

  6. don

    Trade collapsed not only absolutely, but also relative to total income and consumption. But is the graph in real or nominal terms? The collapse coincided with a dramatic decline in the price of oil – this effect should be taken out. After that, the relative decline in trade could be caused, because a decline in consumption comes disproportionately from imports rather than domestic production. This is not obvious – for example, in the U.S., imports should have gained relative to gaz-guzzling behemuths produced by the domestic industry.
    Further, if the focus is on the effects on trade, rather than the composition of consumpton, the relative comparison should remove nontraded goods (housing, medical services, legal services, etc.) Do we have, then, a comparison of the change in real trade relative to real global production of traded goods?
    JG and Footwedge – consumption depends mainly on income and wealth. The recent consumption decline came primarily because people learned that they were not as wealthy as they thought they were (bloated housing and stck prices came to earth), and because some lost income (became unemployed).

  7. ReformerRay

    I have not read the book but I did read the piece by Jeffry Frieden. If the rest of the book contains similar platitudes and exhortations, ignore it.
    The trade deficit countries are the only ones that can restore a balanced trading system (small surpluses and deficits). The trade surplus countries enjoyed the growth in their production capacity created by the trade surpluses.
    It is really stupid for U.S. economists to try to provide advice to others. Our country is at the center of the problem. We tolerated a large trade deficit for years.
    The only way forward for the U.S. create restraint on imports coming into the U.S., but not in the usual fashion. We should discriminate by countries, not products.
    My calculations of the nations that have created the large trade deficit in the U.S. (Highlights, by the Census Bureau) show that 5 countries are responsiblel for 70% of the U.S. trade deficit.
    Rather than berating China, we need a more comprehensive approach – restraining imports from all 5 of the nations that are creating our problem.
    The way to a balanced trading system is reduction in imports into the U.S. by gradually increasing the level of tariffs on ALL manufactured goods entering the U.S. from each of the 5 nations. China, Japan, Germany, Canada and Mexico.
    None of these 5 nations will like this. But the rest of the world should support U.S. actions.
    The way to balanced trade is to reduce the role the U.S. has traditionally played in creating the unbalanced system.
    I think the Chinese official was right when he told Obama to take care of his deficit problem himself rather than expect China to solve our problem.

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