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Trade and Economic Effects of Responses to the Economic Crisis

image of Trade and Economic Effects of Responses to the Economic Crisis

The dramatic collapse in world trade in 2009 is, this report shows, mainly due to: the drop in demand for highly traded products; the drying up of trade finance; and the vertically integrated nature of global supply chains. Contrary to expectations, protectionist measures were relatively muted and did not play a significant part. In fact, because of their sheer size, stimulus measures may have had more impact on trade than direct trade policy measures Nevertheless, dollar for dollar, direct trade restricting measures have the most strongly negative impacts on growth and employment: a one dollar increase in tariff revenues results in a USD 2.16 drop in world exports and a USD 0.73 drop in world income. 

The analyses presented here suggest that exit strategies from measures to deal with the crisis will be most effective in boosting growth and jobs if they first roll back measures that discriminate between domestic and foreign firms and those that target specific sectors. General demand stimulus measures and active labour market policies are preferable under current conditions. 

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Explaining the 2008-09 “Trade Collapse”

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.

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