Decline in global trade noted by WTO

Saw this item from the WTO web site today. The news item speaks to the significant contraction in global trade and the hope that bad will not lead to worse.

WTO SEES 9% GLOBAL TRADE DECLINE IN 2009 AS RECESSION STRIKES The collapse in global demand brought on by the biggest economic downturn in decades will drive exports down by roughly 9% in volume terms in 2009, the biggest such contraction since the Second World War, WTO economists forecast today (25 March 2009). “Trade can be a potent tool in lifting the world from these economic doldrums. In London G20 leaders will have a unique opportunity to unite in moving from pledges to action and refrain from any further protectionist measure which will render global recovery efforts less effective,” said Director-General Pascal Lamy.

On the question of "why"...

Trade growth data show declines that are larger than in past slow-downs. A number of factors may explain this.

One is that the fall-off in demand is more widespread than in the past, as all regions of the world economy are slowing at once.

A second reason for the magnitude of recent declines relates to the increasing presence of global supply chains in total trade. Trade contraction or expansion is no longer simply a question of changes in trade flows between a producing country and a consuming country — goods cross many frontiers during the production process and components in the final product are counted every time they cross a frontier. The only way of avoiding this effect — whose aggregate magnitude can only be guessed at on account of the absence of systematic information — would be to measure trade transactions on the basis of the value added at each stage of the production process. Since value-added, or the return to factors of production, is the real measure of income in the economy, and trade is a gross flow rather than a measure of income, it follows from the reasoning above that strong increases or decreases in trade flow numbers should not be interpreted as an accurate guide to what is actually happening to incomes and employment.

A third element in current conditions that is likely to contribute to the contraction of trade is a shortage of trade finance. This has clearly been a problem and it is receiving particular attention from international institutions and governments. The WTO has been playing a role as honest broker by bringing together the key players to work on ensuring the availability and affordability of trade finance.

A fourth factor that could contribute to trade contraction is protection. Any rises in protection will threaten the prospects for recovery and prolong the downturn. The risk of aggravated protectionism is rightly a source of concern going forward.2