People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 32

August 09, 200



Global Trade in a Time of Crisis


C P Chandrasekhar


WITH the world well into the second year of a recession whose intensity is unprecedented in the period since the Second World War, two questions are receiving considerable attention. The first, of course, is whether the evidence of a decline in the rate of contraction of output and rate of increase in unemployment in the US, the G7 and elsewhere in the world is a sign that the recession has touched bottom. The second is whether there is evidence of a degree of desynchronisation of the incidence and intensity of the crisis across countries. The latter, it is argued, would help some countries serve as shock-absorbers by reducing the intensity of the crisis as well as endow the system with sources of growth that could ensure recovery once the recession has bottomed out. China and India are two countries that are often referred to in this context.


The case for desynchronisation is difficult to make in a globalised and more integrated world for three reasons. First, globalisation implies that integration of economies through trade is substantially more than it used to be so that a downturn in one part of the globe would quickly transmit itself to other regions and countries. Second, globalisation results in the creation of multi-country production platforms for various final goods. This creates international production chains, so that an increasing share of trade is not the cross-border movement of products from different industries and activities or even of dissimilar products from technologically similar industries. Rather a significant part of trade is intra-industry and involves the movement across borders of semi-finished products at different stages of processing. When a recession hits any particular industry and reduces the volume of trade in that area, the derived demands for the inputs at different stages of the production chain fall, spreading the effects of the recession globally. Finally, trade liberalisation has removed quantitative restrictions and reduced import duties across-the-board in most countries. Depending on the extent of trade liberalisation the relative importance of the domestic market in driving growth has declined to different degrees in different countries. This implies that unless countries alter the degree of protection they resort to, using the domestic market as a foil against the effects of a decline in trade is difficult to ensure. And opting for protection at a time of crisis would only invite retaliatory action from trade partners.  


These features of trade in a globalised world imply that desynchronisation leading to some countries serving as shock absorbers and even sources of stimuli for growth depends on the degree of globalisation and liberalisation itself. This in turn implies that assessments of the extent of desynchronisation cannot rely merely on evidence on the differential distribution of the slowdown in GDP growth or increase in unemployment, but must examine changes in the rate of growth and pattern of world trade as well.





Trade data at a global level is released with a lag when compared with data on GDP and in the case of some countries even when compared with employment and unemployment data. Not surprisingly, it was only in July that the data on international trade trends during the first quarter of 2009 in the G7 countries and the world economy was released by the OECD Secretariat and the World Trade Organisation respectively. To recall, while the slump in production in the developed countries has been with us since the end of 2007, it was in the last quarter of 2008 and the first quarter of 2009 that the crisis was most intense. And whatever evidence we have about the crisis moderating and even possibly bottoming out comes from the second quarter of the year. So the most recent evidence on international trade trends relates to the period when the recession was possibly in its most intensive phase.


As the WTO�s World Trade Report 2009 notes: �Signs of a sharp deterioration in the global economy were evident in the second half of 2008 and the first few months of 2009 as world trade flows sagged and production slumped, first in developed economies and then in developing countries. Although world trade grew by 2 per cent in volume terms over the course of 2008, it tapered off in the last six months of the year and was well down on the 6 per cent volume increase posted in 2007.� The most important trend the evidence points to is the sharp contraction in imports into (and, of course, exports from) the G7 countries. The decline in import growth relative to the previous quarter which was close to 6 per cent in the last quarter of 2008, jumped to 10.5 per cent in the first quarter of 2009. This trend seems to be generalised across the G7.


The contraction in import growth on a year on year basis was even sharper. The quarter-on-previous-quarter and year-on-year rates of growth of imports stood at -9.5 and -23.3 per cent for Germany and -11.8 and -19 per cent in the case of the US. With the G7 countries accounting for 40 per cent of global merchandise imports this must have had a severe contractionary impact on global economic activity.


The slowdown was not restricted to merchandise trade alone. Compared with the previous quarter, the value of imports of goods and services into OECD countries, measured in seasonally adjusted current price US dollars, dropped significantly in the first quarter of 2009, even if less sharply then the volume of goods imports. The figure fell by 15.2 per cent. On a year-on-year basis, the value of imports of goods and services declined by 27.9 per cent. Thus the sharp drop observed in Q4 2008 continued in Q1 2009, though in both comparisons, goods fell much more sharply at about twice the rates than those of services.




The effects of this slowdown on countries like China were visible in 2008 itself. China�s merchandise exports in constant prices which grew by 22 and 19.5 per cent respectively in 2006 and 2007 collapsed to 2.5 per cent. Interestingly the impact on India�a country much less dependent on merchandise exports for growth�was far less dramatic, with the growth rates standing at 11, 13 and 7 per cent respectively.


The impact on China�s exports was particularly sharp in certain product categories. Exports of office and telecom equipment fell by 7 per cent in the fourth quarter of 2008, as compared with the same period of the previous year. This occurred despite the fact that these exports grew at an average rate of 17 per cent during the first three quarters of 2008. According to the WTO, exports of this category of items to the United States �fell even more sharply, registering a 13 per cent decline in the fourth quarter (of 2008) after growth of 10 per cent in the third quarter. Overall, exports of Chinese manufactured goods to the United States increased just 1 per cent over the previous year, after growth of 14 per cent in the third quarter.�


This is significant given the role of this product group in the hi-tech manufacturing sector in China. In the mid-1980s the hi-tech sector was completely dominated by the Radio, television and communications equipment sub-sector, which accounted for almost two-thirds of all hi-tech manufacturing value added. Since then the production of Office and computing machinery has been rising rapidly so that by 2005 it accounted for 39 per cent of hi-tech value added, while that of Radio, television and communications equipment had fallen to 43 per cent. In sum, information technology hardware is central to China�s hi-tech export success and an important contributor to incremental manufacturing GDP.


India�s production and export structure is different. In part India�s ostensible resilience in the face of the global crisis, reflected in a much smaller proportionate decline in its GDP in 2008 (1.4 percentage points on 9.3 percent) relative to China (2.9 percentage points on 11.9 per cent), appears to be because of its much smaller export dependence on manufacturing. In recent years, India�s export dependence has been much more in knowledge intensive services than manufacturing. But this per se does not make the country immune to the effects of the global downturn. World imports of commercial services recorded an increase in annual growth rates from 12 per cent in 2006 to 18 per cent in 2007, only to see a decline in that rate to 11 per cent in 2009. And India�s principal market the United States recorded a decline in the rate of growth of imports of commercial services from 12 per cent in 2006 to 9 per cent in 2007 and further to 7 per cent in 2008. Moreover, India�s interest is in the trade in commercial services (as opposed to transport and travel services) and here the rates of growth in these three years were 16, 22 and 10 per cent respectively. That is even the global trade in services is sharply slowing down in areas in which India has an interest. Yet this is better than the absolute contraction in the volume of merchandise imports.


The real point is that exports in general and therefore the exports of services constitutes a much smaller proportion of GDP in India than merchandise exports constitute in China�s GDP. Hence, it is not India�s less damaging performance in the export area that would count, but the performance of the domestic market and domestic demand.





Seen in this light, the argument that even if the G7 economies, especially the US, continue to bounce along the bottom, the global economy can record a significant recovery because of a return to high growth in China and India does not seem to have much basis. This would require in the first instance a sharp shift in China from growth dependent on external markets to growth dependent on domestic consumption. Secondly, mechanisms must exist in both China and India for a return to high growth based on domestic demand, without spurring inflation. And, third this process must be accompanied by an increase in imports into these countries from the rest of the world, without destabilising movements in the balance of payments and in currency markets, especially in the case of India.


If this combination of factors does not play out, there is unlikely to be a return to high growth in these two large economies, which could help lift the global economy without aggravating pre-existing global imbalances. On the other hand, if there is any revival of growth in these economies because of a leakage of the demand generated by the State-financed stimulus being experimented with in the US, UK and elsewhere in the G7, imbalances both in terms of the global distribution of growth and the global balance of payments would only intensify. This would intensify current demands for a dose of protectionism. Not surprisingly, the World Trade Report from the WTO has among its focal themes, �the challenge of ensuring that the channels of trade remain open in the face of economic adversity.� This, in its view, requires the design of �well-balanced contingency measures� to deal with a variety of unanticipated market situations, with �the right balance between flexibility and commitments� in trade agreements. �If contingency measures are too easy to use, the agreement will lack credibility. If they are too hard to use, the agreement may prove unstable as governments soften their resolve to abide by commitments.� But the current conjuncture seems to be one where such balance would be near impossible to achieve.