Trade and the Global Recession

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  • 1 January 2010
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      • Published in RePEc
Abstract
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 significant 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 flows 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.
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