Follow the Bouncing Ball

The current recession has been accompanied by dramatic changes in trade. Figure 1 presents the pattern of OECD trade as the crisis unfolded. There is a time lag in these data. The trends in trade in late 2008, first spotted in early 2009, invited a mix of consternation and hyperbole in the business and economics press and blogosphere alike. Through the summer of 2009, discussion ranged from worries about export credit shortfalls to resurgent import protection. The focus has been on finding the cause, and the assumption has been that the collapse in trade is unprecedented, inconsistent with the general level of economic downturn, and indicative of a trade-related set of problems calling for trade-specific solutions. Yet, there may actually be two puzzles here. The first is the dramatic fall in trade as the recession deepened. The second is the apparent rebound in trade in the most recent data. What we may be witnessing is an exaggerated collapse and bounce, greater that the corresponding drop and recovery in OECD GDP levels. Applying Occam’s razor, the simple explanation fits the data nicely. Trade has followed the sector composition of the recession.

In the emerging academic literature on trade and the crisis, the papers closest to the points we highlight here focus on the sector composition of the downturn and trade. One set of explanations for the increased sensitivity of trade to GDP swings includes increased complexity in production. Freund (2009), for example, highlights fragmentation in production. She also notes that durable goods are most affected, historically, by financial downturns. This includes iron and steel. McKibbin and Stoeckel (2009) work with a CGE model modified to include elements of the financial crisis. They find that the drop in durables is much higher than for non-durables. In addition, the bursting of housing bubble was identified as being most responsible for the drop in consumption and imports, while the change in assessment of risk was largely responsible for the drop in investment. Also working with a CGE model, Bénassy-Quéré, Decreux, Fontagné, and Khoudour-Castéras (2009) emphasize that a large part of the recent drop in the level of trade is linked to price rather than volume effects. They also stress the importance of using appropriate price deflators. GDP price deflators can lead to substantial overestimating of trade volume changes in economic downturns. Willenbockel and Robinson (2009) also use a CGE model, focusing on developing countries and the collapse in global commodity prices as the downturn unfolded. Borchert and Mattoo (2009) focus instead on the relative stability of trade in the crisis. Indeed, in the case of India, the relative service intensity of India’s trade profile served to dampen swings in total trade during the crisis.

Figure 2 presents a quarterly breakdown for the U.S. of GDP and export trends as the recession unfolded in 2008 and early 2009. In the first quarter of 2009, GDP was down at an annual rate of 6.5%, while exports fell 29.9% at an annual rate. Production of goods was down at an annualized 16.4% in the fourth quarter of 2008 and another 8.7% in the first quarter of 2009. Exports of goods were down a striking 25.5% in the fourth quarter of 2008 and 36.9% in the first quarter of 2009. Services production, on the other hand, only fell at an annualized 0.9% in the first quarter 2009, while exports fell at a rate of 13.6%, roughly 1/3 the fall in goods trade in the same period. This pattern is similar to the observations made by Borchert and Mattoo (2009) regarding India. Even at this level of aggregation, it is clear that the goods-side of the U.S. economy has been hit harder than the services side, both in terms of production, and also trade volumes.

To better understand what has been happening to total trade flows in goods, we now turn to a more detailed discussion of the sector composition of production and trade. Figure 3 presents the change in real U.S. goods exports by quarter, in 2007 dollars, by major end use category. From the figure, almost all of the drop has been in investment & durable goods, and industrial supplies. Indeed, motor vehicles alone account for roughly one-third of the total decline. Basically, the recession has been hardest on heavy manufacturing – machinery, vehicles, and related raw materials. This has translated into a deep manufacturing recession, and a correspondingly deep drop in trade. From the import data, it is clear that roughly half of the drop in U.S. import values at the depth of the trade collapse was actually due to a drop in raw materials like oil (Francois and Woerz 2009). The drop in motor vehicle trade actually maps almost exactly to the drop in U.S. production, a point we return to below.

An important point to keep in mind is that manufacturing has a much greater weight in total trade values than it does in value added. While this is obviously true for the OECD countries (where services are typically 70% of value added but only 20% of trade values), it also holds for major developing economies as well. This is illustrated in Figure 4 below. In the figure, we present a breakdown of China’s patterns of production and trade by major sector. The first column presents value added shares, while the second and third present export and import shares. Transportation and other services account for almost half (48%) of value added in China, but only 11% of imports and 7% of exports. Mechanical and electrical machinery dominates both imports (41%) and exports (40%) yet is only 9% of value added. Textiles and clothing, and resource-based manufacturing, account for another 31% of exports, yet only 11% of value added. Indeed, a great deal of China’s value added is in sectors that, on a gross value basis, contribute relatively little to the external accounts. Like the OECD, such patterns mean that for China, a global recession that hits industrial goods sectors the hardest will also have a disproportionate impact on trade relative to GDP. In contrast, for countries where for historical reasons value added is concentrated in industrial supply and machinery sectors (like much of Eastern Europe) the impact of the recession on GDP has been much greater.

Finally, Figure 5 presents the evolution of U.S. production, imports, and exports in the motor vehicles sector. These are all indexes of production, and so reflect “real” trends from 2007 to 2009. Production is based on number of vehicles, while the trade data are deflated using BEA real and nominal price data for Census-based trade categories. What is clear is that, at the sector level, we have an almost exact mapping between trade and production trends. The collapse of U.S. trade in motor vehicles corresponds to the global crisis in the vehicles sector. Because the motor vehicle sector is a large share of U.S. trade, this has also helped drive the collapse in total U.S. trade (again, see also Figure 4). Indeed, the recovery of U.S. vehicle trade in the third quarter of 2009 as restructuring has progressed and credit lines have been re-established has also contributed to almost half of the annualized 21.4% increase in U.S. goods exports in the third quarter of 2009.

There are potentially important public policy questions lurking behind the trade-recession linkages. Has the recession been compounded by a set of trade-specific problems and issues? If so, how big are these, and should we be worried? In confronting these questions, we need to be careful when comparing real and nominal changes in trade. We have clearly witnessed a dramatic drop in world trade, and may also see an equally dramatic surge. For policy purposes though, an important question is whether the decline is out of line with the global shock to GDP and the underlying credit crisis. At the moment, trade seems to be a victim, but one reflecting non-trade weaknesses in credit and demand. The countries with the greatest trade shocks were also more exposed to sectors hit hard by the recession. They are victims, so far, of the general pattern of recession rather than of systemic protection.

This does not mean we should let down our guard against protection. There may be risks for protection on the upside of the trade cycle that did not materialize on the downside. Antidumping regimes are backward looking, using recent trends in data to establish causal links between injury and trade. If trade surges on the upside as rapidly as it fell on the downside, it may be relatively easily to establish spurious links between recovering import volumes and recession-related ill health at the firm level. Indeed, there is evidence that findings of injury in past business cycles have been a function of general macroeconomic conditions in both OECD and developing country regimes. (Feinberg 1989, Knetter and Prusa 2003, Francois and Niels 2006). So, while the cure for the symptoms lies in curing the underlying illness -- recession linked to a deep credit crisis – it is important to maintain a rearguard action on the import protection front.

Notes:
This post also appears in a slightly different format as part of Richard Baldwin's e-book The great trade collapse on VoxEU: "Follow the bouncing ball – trade and the great recession redux," with Julia Woerz. You can download a pdf version here.

REFERENCES:

Bénassy-Quéré, A., Y. Decreux , L. Fontagné, D. Khoudour-Castéras (2009), “Explaining the steep drop in international trade with mirage,” CEPII working paper.

Borchert, Ingo; Mattoo, Aaditya (2009), “The Crisis-Resilience of Services Trade,” World Bank Working Papers 4917, April.

Robert M. Feinberg (1989), “Exchange Rates and "Unfair Trade," The Review of Economics and Statistics, Vol. 71, No. 4 (Nov., 1989), pp. 704-707.

Francois, J. and J. Woerz (2009), “The Big Drop: Trade and the Great Recession,” VoxEU, March.

Francois, J. and G. Niels (2006), “Business Cycles, the Exchange Rate, and Demand for Antidumping Protection in Mexico,” Review of Development Economics, (3):388-399.

Freund, Caroline (2009), “The Trade Response to Global Downturns. Historical Evidence,” World Bank Working Papers 5015, August 2009.

McKibbin, W.J., and A. Stoeckel, (2009), “Modelling the Global Financial Crisis. Centre for Applied Macroeconomic Analysis,” The Australian National University, Working Paper 25/2009.

Knetter, M. and T. Prusa (2003), “Macroeconomic factors and antidumping filings: evidence from four countries,” Journal of International Economics, 61(1): 1-17.

Willenbockel, Dirk; Robinson, Sherman (2009), “The Global Financial Crisis, LDC Exports and Welfare: Analysis with a World Trade Model,” Munich Personal RePEc Archive Working Paper No. 15377, April.

The Big Drop: Trade and the Great Recession

Recent trends in trade have invited a mix of consternation and hyperbole in the business and economics press and blogosphere alike. Discussion has ranged from worries about export credit shortfalls to resurgent import protection. The focus has been on finding the cause, and the assumption has been that the collapse in trade is unprecedented, inconsistent with the general level of economic downturn, and indicative of a trade-related set of problems calling for trade-specific solutions. There are indeed important public policy questions here. Is this recession being confounded by a set of trade-specific problems and issues? If so, how big, and should we be worried?

In confronting these questions, we need to be careful when comparing real and nominal changes in trade. The last 12 months have seen a dramatic drop in commodity prices, so that real and nominal trade data can tell a very different story. In addition, because the importance of various sectors in trade varies from their importance in GDP, and also varies considerably across countries, we also need to pay close attention to how we deflate trade flows to control for falling prices across a range of commodities. We also need to examine what is happening to domestic production (specific elements of GDP) before deciding we have a mismatch between trade and GDP trends.  

Global trade plummeted in the last months of 2008. Indeed, world trade volumes fell 13.7% from December 2008 to February 2009. (This is somewhat better than than the November-January drop of 17.5%, reflecting a 0.8% rise in February.)  In the three months ending in February, Japanese exports were down 29.1%. EU15 exports were up 0.3% in February over January levels, after falling 2.3 percent in December and 5.3 percent in January.  (CPB World trade monitor from April 21, 2009). The projections for the entire year 2009 offer little comfort. The WTO has forecast a 9% decline in global export volumes for 2009. 

When digesting this information, the arcane question of appropriate price deflators is important. Real trade figures can vary substantially according to the underlying prices used for deflating the data. The recent, highly cited WTO-figures rely on world GDP prices. There are problems with this approach. GDP includes a high share of non-traded components. Trade prices have fallen considerably, not least due to the large decline in oil prices. According to the CPB, energy prices were down 51.1% in the 4th quarter, compared to the 3rd.  Consequently a smaller real drop is to be expected when deflating the value of trade flows with trade prices. The CPB figures quoted above are based on world trade price developments. In a modelling exercise by the French Centre d’Études Prospectives et d’Informations Internationales (Bénassy-Quéré et al. 2009) these differences are illustrated very clearly with trade falling – under identical scenarios concerning world GDP growth – by 8.9% when deflated by the GDP deflator and only by 1.7% when using constant trade prices. Thus, a large part of the story hinges on global price developments. Nominal EU-27 exports grew by 3.1% in 2008, while in real terms they had already fallen by 0.9% over the year due to the oil-price hike and subsequent fall that ran through 2008. Interestingly this comes from falling real intra-EU exports (-2.3%), while extra-EU exports still grew in real terms (by 3.6%) in 2008. In the US, nominal exports grew by as much as 12.4% in 2008, but with 6.4% only half as much in real terms.  

What is striking is the rapid drop in trade in the second half of 2008. This is shown in the figure below. Through August 2008, U.S. exports were still 20% above corresponding August 2007 levels in nominal terms. However, the trade tides have turned quickly, and by January 2009 exports at current prices were 21.5 percent below January 2008 levels, very much noticed by the general public. Similar trends can be seen in European data. But even in real terms, the drop was huge. Real year-on-year growth rates in the US exceeded 10% up until August 2008, followed by a stagnation of real exports and real declines starting to be seen in November and amounting to as much as 19.9% in February 2009. This explains the alarm bells. 

Figure 1. Growth Rates for US Trade, Jan. ’08 – Feb. ‘09

The trade data are certainly disturbing. The fact that GDP contractions have been relatively minor compared to trade (5 or 6 percent in some countries in the last quarter of 2008, but nowhere near 20% as witnessed in early 2009 for trade) is the reason alarm bells have woken up trade policy makers. Before we roll out the trade policy guns, however, we need to identify the underlying forces at work. If we break down recent trends in U.S. trade, and control for the broad mix of price and sector changes driving the overall result, the trade changes look relatively consistent with the general pattern of this recession. The problem is not trade finance, but rather “finance” finance. This recession has been characterized by a massive collapse of credit mechanisms that has hit the capital goods and vehicle sectors particularly hard. It turns out that motor vehicles are also the driver of much of the recent trend in OECD trade data. We focus here on the U.S., but a similar story can be told with German data as well. 

The figure below presents a break down in the change in U.S. trade flows for the 12 months ending February 2009. We present both nominal flows, and also real flows. For real changes, we use BEA price deflators for traded goods by broad Census categories, as reported by the BEA. We have used these to express all real flows in 2007 dollars.

Figure 2. Change in US Exports, Feb. ’08 – Feb. ’09.



From the figure above, it is clear that roughly half of the drop in imports over the 12 months ending in February 2009 was due to a drop in raw materials like oil (“industrial supplies” in the figure). However, much of this was due to the collapse in commodity prices. Once we control for this, 55.7 percent of the “real” drop in exports is in motor vehicles and capital goods. Raw materials represent another 24 percent of the drop. Motor vehicles and capital goods represent 61.9% of the real drop in exports. The drop in motor vehicle trade actually lags the corresponding drop in U.S. production. According to BEA, domestic production of cars was down 60% from February 2008 to February 2009 – from 342.8 thousand units to 138.7 thousand. Over the same period, real exports fell “only” 45%, which is slightly better than the 47% drop from January 2008 to January 2009.

The table below presents the trade situation for a broader set of countries. For some countries, the decline in real terms was greater than in nominal terms, implying an underlying fall in export prices. For other countries real changes are lower than nominal changes, i.e. prices in 2008 were still rising, even if moderating.

Table 1. Year-on-Year Growth Rates of Monthly Exports, Jan. ’08 – Feb. ’09.

Source: Eurostat COMEXT, and BEA.

We have clearly been witnessing a dramatic drop in world trade. For policy purposes though, an important question is whether the decline is out of line with the global shock to GDP and the underlying credit crisis. At the moment, trade seems to be a victim, but one reflecting non-trade weaknesses in credit and demand. The countries with the greatest trade shocks are also more exposed to sectors hit hard by the recession. They are also victims, so far, of the general pattern of recession rather than of systemic protection. This does not mean we should let down our guard against protection. Rather, while maintaining a rearguard action on the import protection front, the cure for the symptoms lies in curing the underlying illness -- recession linked to a deep credit crisis.

REFERENCES

Bénassy-Quéré, A., Y. Decreux , L. Fontagné, D. Khoudour-Castéras (2009), “Explaining the steep drop in international trade with mirage”, presentation at the informal workshop on ‘The Impact of the Economic Crisis on Trade’, April 9 2009, hosted by the OECD, Paris.

Bureau of Economic Analysis, US trade data downloaded on 20 April 2009 from: http://www.bea.gov/newsreleases/international/trade/2009/trad0209.htm.

CPB Netherlands Bureau for Economic Policy Analysis (2009), “CPB Memo: World Trade Monitor”, downloaded on 21 April 2009 from: http://www.cpb.nl/eng/research/sector2/data/trademonitor.html

Eurostat, Common External Trade Database, download on 20 April 2009 from: http://epp.eurostat.ec.europa.eu

note:

This post is written jointly with Julia Woerz, and is also published on VoxEU here:

http://www.voxeu.org/index.php?q=node/3527

You can download a pdf version here.

Trade is Falling, but Credit is not Due to Protectionism (yet)

Alarm bells are ringing. Trade is falling, and so we have rounded up the usual suspect -- import protection. Yet we really have not seen a sustained wave of protection so far, only a wave of anxiety. What we have seen is a real collapse in trade volumes, caused by a mix of falling demand, buyer uncertainty, and an apparent lack of export credits. It is striking that in recent revisions to U.S. GDP statistics for the end of 2008, it now appears that U.S. real exports fell 23.6 percent in the last quarter of 2008, while real imports fell 16.0 percent.

The drop in world trade is very real. The jury is out on the cause. How deep is the collapse? According to Wharton, the Baltic Dsy Index for shipping prices is down 90% from its May 2008 peak. In addition, there is evidence that perhaps half the global shipping fleet is idle. This is the mirror to falling domestic economic activity across the globe. Import protection certainly will not help. However, we need to devote energy to a better understanding of what has driven the collapse so far if we want to address the issue. Credit may be a big part of the picture. Apparently, carmakers in Japan are unable to get loans for their American customers, while exporters in a range of industries complain that lack of credit makes international shipments almost impossible.

References
Countries Stepping in to Finance Export Trade, New York Times, 3 March 2009.
Trade Wars: Will Protectionism Win out over Recovery?, Wharton Knowledge, 18 February 2009.