The Great Synchronisation: What do high-frequency statistics tell us about the trade collapse?

Sónia Araújo y Joaquim Oliveira Martins, VOX, 8 de julio 2009

In a recent Vox column, Barry Eichengreen and Kevin O’Rourke (2009) provided evidence that trade flows are fallen much more sharply during this crisis than the Great Depression (also see Freund 2009). Figure 1 corroborates these findings. It depicts total trade year-on-year growth rates using monthly trade statistics for 23 OECD countries, for which historical data is available, from January 1965 to March 2009. Although there have been periods of sharp and sudden trade declines in the past, the one that took place at the end of 2008 is unique. After more than six years of positive trade growth, trade turnover turned negative in October 2008, reaching a record low of -33% in February 2009!

Figure 1. Trade turnover: Year-on-year monthly growth rates, January 1965 to March 2009

Source: OECD MSIT database, Note: OECD 23 excludes the Czech Republic, Hungary, Republic of Korea, Mexico, New Zealand, Poland and Slovak Republic. These 23 OECD countries represent the bulk of OECD international merchandise trade (more or equal than 90% of total trade up to November 1993 and 87% in March 2009). The blue bands identify major turning points associated with crisis episodes.

The magnitude of the current trade crisis stands out in comparison with previous drops in trade flows – previous crises averaged 13 months and -2% growth, with the worst negative growth rates registering at -14% in October 1982.1 The average negative growth rate between October 2008 and March 2009 was -21.22%.

Such drops in nominal trade values are rare events. Of the 531 months under analysis (from January 1965 to March 2009, inclusive), trade turnover is negative only for 15% of the months (Figure 2). What stands out from the data is the magnitude and duration of the current drop, as the five months since October 2008 are top five most negative trade growth rates since January 1965 (the first three months of 2009 hold the top three positions, see Figure 3).

Figure 2. Monthly year-on-year growth rates (sorted by decreasing order), January 1965 to March 2009

Source: OECD MSIT database.

Figure 3. Months of year-on-year negative growth rates (sorted by decreasing order)

Source: OECD MSIT database.

In short, it is the first time since January 1965 that the magnitude of total trade drops is bigger than 20%. It is also the first time since January 1965 that total trade drops by more than 10% for five months in a row.

Extreme for the world but not for most nations

However, when looking at trade series for individual countries this extreme aggregate picture does not emerge. Several OECD countries have experienced drops of similar magnitudes in the past (Figure 4). For instance, in July 1993, France’s total trade decreased by 23% relative to its value in July 1992. The same year, trade declined by more than 20% in January and July in Italy and Germany, with Italy registering four more months of negative trade growth below 20%. In Japan, trade dropped by approximately 25% relative to the same month in the previous year in December 2001, while in the US, trade dropped by 34% and 24% in January 1965 and 1969, respectively.2

Figure 4. Trade Turnover for selected OECD countries (year-on-year monthly growth rates)

Source: OECD MSIT database.

The current trade crisis is a uniquely synchronised fall

A pattern standing out from Figure 4 is that periods of abrupt decline of total trade flows were not uncommon at the individual country level, but these drops were not occurring simultaneously. The unique feature in the current crisis is the negative growth rates exceeding -10%, from November 2008 onwards for all six countries depicted,3 with the fall increasing to more than 20% as of January 2009.

Figures 4-5 try to uncover this striking synchronisation with an aggregate indicator. The figures display, for exports and imports separately, the percentage of OECD countries that exhibit a monthly year-on-year trade growth rate that is: i) negative, ii) below -5%, and iii) below -10%. To focus on the current decline, the analysis includes all 30 OECD member countries since January 1998.

The remarkable degree of synchronisation emerges rather neatly. There have been episodes of synchronised trade declines, namely following the dot.com crisis and September 11, but by end-2008 suddenly more than 90% of OECD countries exhibit simultaneously a decline in exports and imports exceeding 10%. It is the synchronised and large drop in trade in every OECD country that explains the collapse in international trade.

Figure 5. The “Great Synchronisation”: Percentage of countries with negative export value growth

Source: OECD MSIT database.

Figure 6: The “Great Synchronisation”: Percentage of countries with negative import value growth

Source: OECD MSIT database.

Service trade has been more resilient than trade in goods

Quarterly data from the Balance of Payments database for selected OECD countries (Figure 7) reveals that both trade in goods and services exhibited a synchronised decline in the last quarter of 2008, with almost half of the OECD economies showing a decline already in the third quarter for all the four series (exports and imports of goods and services): Austria, Belgium, Czech Republic, Denmark, Finland, France, Ireland, Netherlands, New Zealand, Norway, Spain, Sweden, Portugal and the UK.

While trade is falling in both goods and services, the data so far shows that in most OECD countries the decline in trade in goods has been sharper than the decline in trade in services. Switzerland stands out a special case, with a more abrupt fall in service exports. Trade in goods and services are declining at similar rates in only a small group of OECD countries (Hungary, Italy, South Korea, Luxembourg, New Zealand and Spain). In Australia and Mexico, exports of services seem to be rising while in the Netherlands this is the case for services imports.

To conclude, while several culprits have proposed to explain the trade collapse (e.g. credit crunch, global production chains, generalised loss of confidence), the great synchronisation underlying the current collapse suggests that is probably their interaction rather than their individual effects that may explain what has happened to international trade. The collapse may also reveal new patterns in the structure of trade flows. All this opens interesting research questions for international trade economists.

Figure 7. Trade in goods vs. trade in services

Source: OECD BoP database. Note: index values (2008 Q1 = 100).

Footnotes

1 For the purpose of this analysis, periods of trade crisis are identified as periods of negative trade growth, which end in the month predating 3 consecutive months of positive trade growth.

2 Notice that all these countries were experiencing negative growth rates of more than 20% in the first quarter of 2009, and some in the last quarter of 2008. Months of negative trade growth below 10% are much more frequent: 35 for Italy, 34 for France, 32 for Japan, 29 for Germany and the UK and 23 for the USA, while total trade for the 23 OECD countries under analysis dropped by more than 10% in 13 of the 531 months between January 1965 and March 2009, inclusive.

3 With the exception of Japan, where the drop in total trade in November 2008 reaches 9%.

References

Eichengreen, B. and K. O’Rourke (2009). “A Tale of Two Depressions,” VoxEU.org, 4 June 2009.

Freund, Caroline (2009). “Demystifying the collapse in trade,” VoxEU.org, 3 July 2009.

OECD Monthly Statistics of International Trade (MSIT). Available at http://stats.oecd.org