Understanding the global trade slowdown

2 PM, Seminar room, Department of Economics and Management

Speaker: Tullio Gregori, University of Trieste

Abstract

World trade suddenly plummeted in the last quarter of 2008 after the bankruptcy of Lehman brothers and the subsequent meltdown in financial markets. It was the sharpest and deepest collapse since the last world war. According to a well-established consensus, this breakdown was caused by the sudden recession-induced postponement of durable good purchases by families and firms. This collapse was greatly magnified by Global Value Chains that reduced intermediate procurements. Even if the following recovery was impressive, trade growth is now noticeably below trend. The anaemic momentum in global trade is now a well-known feature of the world economy and there is a growing literature addressing the “new normal” for international trade. The overall weakness in economic activity, in particular in investment, has been claimed to be the primary restraint on trade growth, accounting for up to three-fourths of the slowdown. Other factors are weighing on trade such as the waning pace of trade liberalization and the pull back of Global Value Chains. This paper tries to assess the contribution of these drivers to the recent slowdown via a trade elasticity equation that separately takes into account the impact on imports of final demand components and Global Value Chains. Its centerpiece is an import intensity-adjusted demand, computed as a weighted average of investment, private consumption, government spending and exports, where the weights are the import contents of demand. Using this explanatory variable, we perform a standard analysis in a panel framework using standard OECD quarterly macro-level data and information derived from international I-O tables.

Keywords: global trade slowdown, trade elasticity, global value chains, WIOD.