This study was undertaken in response to the dramatic fall in trade flows that occurred during the height of the economic crisis and amid fears that trade-specific factors might be at work, including protectionist measures. It was found, however, that resort to such measures has been relatively muted and that a more important role in the trade crisis was played by collapsing demand, the drying up of trade finance, and the vertically integrated nature of global supply chains.

This study was undertaken by the OECD’s Trade Committee in response to the financial and economic crisis that started in 2008. The 12.5% fall in global trade in 2009 is explained by several factors: the collapse in demand, the drying up of trade finance, a larger fall in demand for highly traded goods (such as machinery and transport equipment) relative to less traded goods and services, and the vertically integrated nature of global supply chains.

This chapter summarises the main findings of this report and draws out the main conclusions. While the report finds that protectionist responses to the crisis were relatively muted and protectionism does not explain a major part of the fall in trade that occurred, vigilance is nevertheless needed. Stimulus measures taken behind borders may have very significant effects on trade, especially if they target specific sectors or only domestic goods or firms. Analysis of the stimulus measures generates some insights into exit strategies that could be supportive of growth, employment and trade. It is expected that protectionist sentiment will increase as unemployment remains high and governments are increasingly under fiscal pressure. Concluding the Doha Development Agenda negotiations could prevent backsliding and provide a much needed impetus to growth.

The collapse in trade during late 2008 and early 2009 has been severe both in absolute terms and relative to the fall in GDP. This triggered concerns that there might be particular factors affecting trade during the crisis, including worries about protectionism. Evidence presented here shows that the severity of the 2008-09 trade “collapse” was not unprecedented after all. To a large extent the collapse in trade was a consequence of: (1) The collapse in domestic demand though the consequences of falling demand reached some economies because of their trade links; (2) the disproportionate fall in output and trade of capital goods that make up a larger share of trade than of GDP; and, (3) the temporary drying up (and subsequently lower availability and higher cost) of short-term trade finance. The paper argues that the increasing importance of intermediate inputs in world trade flows cannot explain why the fall in trade was much larger than the fall in GDP, though it can explain why the share of trade in GDP has increased. It also explains, at least in part, the highly synchronised nature of the trade collapse.

This chapter reviews policy measures that have been taken in OECD countries and other major economies in response to the crisis. The chapter is constructed around two axes. First, it provides an overview of policy responses directly affecting trade. Second, it reviews all behind-the-border developments observed after September 2008 that have had an indirect effect on world trade. Our analysis reveals that both measures facilitating and restricting trade have been introduced, but no strong pattern emerges concerning the profile of countries choosing one direction over the other. The frequency of measures has nevertheless been higher in sectors such as agro-industries, metal, chemical industries, and products originating from Asia. The amount of imports directly targeted by all new trade measures is relatively small, yet government intervention behind the borders has been extensive; so a priori, that is where the impact on trade could be the greatest. Lastly, a brief discussion of the trade impact of government procurement policies and interventions to support the financial sector has also been included in this chapter.

Which measures taken in response to the crisis bring most benefits both to the country implementing the policy and to the world? This question is addressed in this chapter using numerical simulations of the broad range of policy measures taken in response to the crisis. The analysis concentrates on behind-the-border measures but also looks into direct trade policy instruments, although these have not been major elements in the policy response. The analysis unambiguously shows that import protection is particularly unproductive and can be detrimental to the fragile economic recovery. Demand stimulus measures generally perform better than supply side measures, but sector specific measures, or measures favouring domestic products are inferior to more generic measures. Sector-specific supply side measures are overwhelmingly negative for partner countries who might find themselves entangled in a mutual subsidy spiral. They are also very difficult to unwind because of the rents they create.

The stylised simulations of policy measures yield insights into their wider economic effects, and they can alert policy makers to unintended side-effects that only become apparent when taking an economy-wide and international viewpoint. Specific implementation details play a great role, as was highlighted in Chapter 3, but those are impossible to incorporate into a simulation analysis as pursued here.

The methodology used to ascertain the effect of changes in the stock of trade finance, demand and the cost of financing on both import flows and total trade is assessed in this annex. It is well known that there is a paucity of reliable data on trade finance. We use a proxy to assess the impact of changes in trade finance on cross-country changes in imports and total trade over time. In particular, we estimate separately the last three quarters of 2008 and first quarter of 2009 and investigate how the effect of changes in trade finance availability, demand and cost of financing may have affected imports and total trade flows before and after the onset of the crisis.

This appendix decomposes the policy effectiveness indicators (change in the variable of interest divided by the money value of the policy shock) using regression analysis. The objective is to relate the design characteristic of the policy to its effectiveness as defined by the multiplier. The regressions are performed over the set of simulation results on unilateral policy moves, yielding 56 observations. Table Annex E.1 reports the results. As can be seen, only a few of the estimated coefficients are highly statistically significant, and hence the estimates need to be carefully interpreted. Nonetheless, the table could be used as a guide.