The Slowdown in Global Trade: A Symptom of A Weak Recovery (original) (raw)
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The Slowdown in Global Trade: A Symptom of A Weak Recovery1
2017
Global trade growth has slowed since 2012 relative both to its strong historical performance and to overall economic growth. This paper aims to quantify the role of weak economic growth and changes in its decomposition in accounting for the slowdown in trade using a reduced form and a structural approach. Both analytical investigations suggest that the overall weakness in economic activity, particularly investment, has been the primary restraint on trade growth, accounting for about 80% of the decline in the growth of the volume of goods trade between 2012-2016 and 2003-2007. However, other factors are also weighing on trade in recent years, especially in emerging market and developing economies, as evidenced by the non-negligible role attributed to trade costs by the structural approach.
Explaining the Slowdown in Global Trade
2015
Following the global financial crisis, global trade contracted sharply and, after an initial recovery, grew at an unusually slow pace relative to global GDP. This article reviews cyclical and structural explanations for this phenomenon, and finds econometric evidence that cyclical factors – namely shifts in the composition of aggregate demand toward less import-intensive components and heightened economic uncertainty – can explain most of the slowdown in trade in a panel of advanced economies. Although the slowdown in aggregate global trade is well explained by the model used, the results vary by country. For Australia, the model performed well until 2012, after which it over-predicted import growth, most likely because it did not adequately capture the import intensity of mining investment and resource exports.
The Falling Elasticity of Global Trade to Economic Activity
Since the recovery from the great financial crisis in 2010, global real trade flows grew much slower than pre-crisis, in both absolute terms (growth rates) and relative terms (relative to GDP, from 2:1 in the great 1990's to 1:1 since 2012) A debate has arisen as to whether this global trade slowdown, and related falling trade-to-income elasticity, was structural or cyclical. Some papers emphasized the slowing pace of international vertical specialization. Other works emphasized the prominent role of aggregate demand, notably when weighted by its trade component. Our paper goes in this latter direction. We estimated the standard import equation for 38 advanced and developing countries over the period 1995-2015, using an import intensityadjusted measure of aggregate demand (IAD), calculated from input-output tables at country level, and compared results with regressions using GDP. The integration of IAD allows us to predict 76% to 86% of the changes in global imports, a better performance than if using GDP. The use of IAD also enabled us to measure the relative importance of each component of demand, according to their trade intensity. The model is able to account for over 90% of the recent trade slowdown (2012-2015), with IAD alone explaining 80% of it. The slowdown in global value chains explains more than half of the remaining share of the global trade slowdown, not explained by demand factors. Protectionism does not come up as statistically significant.
The Global Trade Slowdown: A Dynamic Approach
2017
Since 2012, global trade growth has slowed significantly relative to both its historical trend and output growth. There is some debate around whether this slowdown is due to cyclical or structural factors. The answer to this question has important implications for future trade growth. We develop a dynamic quantitative two-country model in which trade responds gradually to changes in trade costs. We capture cyclical and structural factors with movements in productivity and trade costs. We use Bayesian estimation to match the model with time series from the data. We then compute the contributions of cyclical and structural factors on the slowdown. Our model also offers insights on how changes in productivity and trade costs affect trade and output in different ways.
Trade and the Global Recession
2011
The World Trade Organization forecasts that the volume of global trade will in 2009 exhibit its biggest contraction since World War II. This large drop in international trade is generating signi…cant attention and concern. Given the severity of the current global recession, is international trade behaving as we would expect? Or alternatively, is international trade shrinking due to factors unique to cross border transactions per se? This paper merges a global input-output model with a gravity trade structure in order to quantitatively answer these questions. The framework distinguishes a drop in trade resulting from a decline in the tradable good sector from a drop resulting from worsening trade frictions. We demonstrate empirically that given the geographic distribution and size of the decline in demand for manufactures, the overall decline in trade ‡ows of manufactured goods is in fact larger than would be expected, though the scale of this deviation does not stand out as historically exceptional. We use the model to solve numerically several counterfactual scenarios which give a quantitative sense for the relative importance of trade frictions and other shocks in the current recession. Our results suggest that the decline in demand for manufactures is the most important driver of the decline in manufacturing trade. An increase in trade frictions also plays an important role, but one that varies substantially across countries. We thank Christian Broda, Marty Eichenbaum, Chang-Tai Hsieh, Anil Kashyap, Denis Novy, and Ralph Ossa as well as participants at numerous seminars for helpful discussions and comments.
Analyzing Trade Growth Effects of Deviations from Long-run Economic Growth
This paper explores the relationship between trade growth and long-run trends in real GDP growth from a purely empirical perspective. Its novelty lies in the way that it models trade growth: as a function of cyclical trends in real GDP growth. The main finding is that trade growth responds asymmetrically to deviations from long-run GDP growth. Generally, trade growth is positive and statistically significant when GDP growth is above the long-run trend. On the other hand, trade growth ceases but does not become negative when GDP growth falls below its long-run trend. While this behavior holds true broadly, individual countries’ trade growth may respond differently when GDP growth is above or below trend. Comparatively, low-income countries’ trade growth takes the greatest hit when economic growth slows, while lower-middle and high-income countries are least affected. These findings have potential implications for trade policy-making in the twenty-first Century especially given the current atmosphere of anti-globalization and slow trade growth.
Trade, investment and growth: nexus, analysis and prognosis
Journal of Development Economics, 2003
Patterns of causation between income, export, import, and investment growth for 39 developing countries are examined using model selection techniques which are based on ex-ante predictive ability criteria to identify the best predictive model for each country. In particular, we look at the incidence of causation and reverse causation between various economic variables which are commonly believed to lead economic growth and find that there is less reverse causation from income to these variables than previously thought. We also construct an index of global business cycle conditions, and find that models of countries with high trade exposure, growth rates, and investment rates tend to gain in predictive ability from the addition this variable.
Trade and Economic Growth: A Re-Examination of the Empirical Evidence
SSRN Electronic Journal, 2000
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Limits to Trade Growth: Decomposing Manufacturing Trade
International Journal of Economics and Finance, 2017
This paper decomposes manufacturing import growth rates in 5 large industrial and 8 large developing countries and measures the relative contributions of domestic demand and market share changes for 1986/87, 1991/92, 1996/97, 2001/02, 2006/07 and 2011/12. Imports as a share of domestic value added has increased significantly over this period and account between 70 to 80 percent of import growth during this period. Exports from developing countries and especially China account for the bulk of this increase. China is an exception to this development and its import shares have not increased and have actually decreased during the last period. Finally future trade growth rates are going to decrease. We show that most of the early growth of trade was caused by trade liberalizations from almost closed economies and initial import shares were very low so that small changes led to high trade growth rates. Now that the market shares are already very high, it is almost impossible to replicate ...
SSRN Electronic Journal, 2000
Global and U.S. trade declined dramatically in the wake of the global financial crisis in late 2008 and early 2009. The subsequent recovery in trade, while vigorous at first, gradually lost momentum in 2010. Against this backdrop, this paper explores the prospects for global and U.S. trade in the medium term. We develop a unified empirical framework -an error correction model -that exploits the cointegrating relationship between trade and economic activity. The model allows us to juxtapose several scenarios with different assumptions about the strength of GDP growth going forward and the relationship between trade and economic activity. Our analysis suggests that during the crisis both world trade and U.S. exports declined significantly more than would have been expected on the basis of historical relationships with economic activity. Moreover, this gap between actual and equilibrium trade is closing only slowly and could persist for some time to come.