World Trade: Will It Bounce Back Quickly?

Here’s a good article from the Economist. It discusses the fall in world trade and touches on a issue for which I’ve come up with no firm conclusion.

The author notes the rapid fall in world trade as well as the fact that the decline has affected so many countries. Sort of an equal opportunity downturn. He makes a very good point about the nature of imports and exports today.

Economists believe that an additional reason for these sharp and co-ordinated drops lies in a fundamental change in the nature of global trade over the past three decades, as a result of the rise of global supply chains. When David Ricardo posited that comparative advantage was the basis of trade, he conceived of countries specialising in products, such as wine or cloth. Now, they specialise not so much in final products as in a step, or steps, in the production process, what economists call “vertical specialisation”. Vertical specialisation has grown by about 30% and accounts for a third of the growth in trade over the past 20 to 30 years.

Vertical specialisation led trade to grow much faster than it would have otherwise. Earlier, a tractor made in America would use American steel and parts: its only contribution to trade would come if the finished item were exported. Now, that tractor may use steel from India that is stamped and pressed in Mexico, before being exported to Tanzania. Global supply chains have increased the amount of international trade involved in getting a product made and delivered to its final user.

Naturally as global demand fell, the same characteristics he describes accelerated the decline in world trade. The dark side of vertical specialization was exposed.

This is another incidence of what, to me, has been one of the most striking things about this recession. Specifically, the absolutely blinding speed at which this economy and economies around the world deteriorated. What took three years to transpire in the 1930’s literally happened within a span of three months.

The speed of the decline does not mean that a recovery will be equally rapid not does it mean that it could not occur at a similar rate. If anything, I am willing to accept that a lot of ideas about economies and how they function needs to be rethought and we should not be surprised at the route the recovery takes.

The author of the Economist article postulates that the leverage inherent in vertical specialisation will kick in once a recovery is under way. If that is the case then it should accelerate recovery over all which would be consistent with the different pace experienced so far.

As I said, I haven’t drawn any conclusions. I’m not sure I could until this is over and hindsight allows for that “why didn’t I see that” moment. For the moment I guess all that can be done is to hope that there is some unseen turbocharger that works both on the upside as well as the downside.

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