Giordano Mion and colleagues investigate whether the trade collapse of 2008-09 reflected a crisis of international trade itself

Giordano Mion

English

Research Papers in Economics

CentrePiece Winter 2010/11
24
W
orld trade in
manufactured goods fell
by about 30% between
the first half of 2008 and
the first half of 2009. This trade collapse
exceeded the fall in global GDP as well as
the trade fall predicted by many standard
economic models.
Explanations abound, as illustrated by
the comprehensive discussion in the
volume of studies edited by Richard
Baldwin (2009). Some emphasise a crisis
of the supply side of trade, citing such
causes as a shortage of trade finance,
disruption of global value chains and
increased barriers to trade as governments
implemented protectionist measures. For
others, the fall in trade is simply the
flipside of a fall in the demand for
manufactured goods, postponed
purchases of intermediate goods and the
drawing down of inventories.
Which explanations turn out to be
correct? Analyses at the aggregate level
and/or the level of broad product
categories are not well suited to providing
a clear answer to this question because
the different effects and margins of trade
adjustment cannot be separately
identified. Econometric analysis of firm-
level data is therefore critical to
discriminate between alternative
explanations.
Yet despite a wealth of statistical
analysis, econometric work on firm-level
data is scarce. To the best of our
knowledge, only one study makes use of
some firm-level data, examining the fall in
French trade among various classes of
exporter size and various sectors that
depend to different degrees on external
finance (Bricongne et al, 2009). But the
study does not exploit individual firm
characteristics to discriminate between
different explanations for the trade
collapse.
Our research tries to fill this gap, using
data on Belgian exports and imports at the
firm-product-country level as well as a
wealth of balance sheet information. We
compare the first half of 2008 and the
first half of 2009 as Belgium’s trade
collapse started in November 2008. Four
key findings stand out, which together
World trade fell dramatically in 2009 after the
financial crisis worsened in the autumn of 2008.
According to research by Giordano Mion and
colleagues, the trade collapse reflected a steep
drop in global demand rather than something
specific to trade, such as growing protectionist
measures.This was not a crisis of international
trade itself.
Trade
crisis– what trade crisis?
The trade
collapse was
driven by
changes in prices
and quantities
rather than
changes in
numbers of
active firms,
products traded
and national
markets servedCentrePiece Winter 2010/11
25
lead us to conclude
that the trade collapse
did not result from a crisis of
international trade itself:
  First, the fall in trade
overwhelmingly occurred at the ‘intensive
margin’ – that is, in the prices that trading
firms charged and the quantities they sold
– rather than at the ‘extensive margin’ –
that is, in the number of firms involved in
trade and the range of products they sold
and national markets they served.
  Second, the fall in demand for
tradable goods – which particularly
affected durables and intermediate goods
– represents the most important
explanation for the decline in the 
intensive margin, contributing 70-80% of
the total fall.
  Third, although trade finance and
involvement in global value chains played
some role in the reduction of trade, they
affected domestic operations in a roughly
similar way. 
  Fourth, percentage changes in
exports and imports did not systematically
deviate from changes in turnover and
intermediate consumption respectively. 
A fall at the intensive 
margin of trade
Which margins mattered most for the
2009 trade collapse: firm entry or exit;
adding or dropping products and markets;
or price and quantity adjustments? The
answer to this question is important:
changes at the intensive margin (where
firms reduce prices and quantities within
existing trading relationships) are likely to
be less durable and less costly than
changes at the extensive margin (where
firms drop out of some markets altogether
or reduce the range of products sold).
Table 1 shows that virtually all of the
trade collapse was driven by changes in
the prices quoted and the quantities
shipped. Though both exports and imports
fell by about 27%, almost all trading firms
remained active, with hardly any changes
in the average number of countries they
traded with or in the average number of
products shipped to or sourced from each
country.
On the one hand, these results echo
findings by CEP’s Stephen Redding and
colleagues on the impact of the Asian
financial crisis on US trade along these
different margins (Bernard et al, 2009).
They also confirm evidence on comparable
French data for the 2008-09 crisis
(Bricongne et al, 2009).
On the other hand, these results
highlight the extreme flexibility of business
relationships across firms, their input
suppliers and their clients. This is
reassuring: a massive reduction in the
number of trading firms, countries or
products would probably make recovery
more costly and sluggish.
Table 1:
Changes in the margins of Belgian trade, comparing the 
first half of 2008 and the first half of 2009
Total imports (all firm-country-product combinations)
Extensive margin Intensive  Components
margin of sales
Period Total imports Firms Countries Products Sales Quantities Prices
First half of 2008 €106.10bn 31,497 3.88 7.02 €123,681 118,747 1.04
First half of 2009 €76.64bn 33,576 3.74 6.78 €89,855 98,089 0.92
Percentage change between 
2008 and 2009 -27.77% 6.60% -3.54% -3.32% -27.35% -17.40% -12.05%
Percentage contribution of
each margin to the fall in trade 1.79% 98.21%
Total exports (all firm-country-product combinations)
Extensive margin Intensive  Components
margin of sales
Period Total exports Firms Countries Products Sales Quantities Prices
First half of 2008 €101.25bn 18,053 6.62 5.58 €151,844 115,277 1.32
First half of 2009 €74.69bn 18,227 6.49 5.59 €112,925 92,221 1.22
Percentage change between 
2008 and 2009 -26.23% 0.96% -1.92% 0.16% -25.63% -20.00% -7.04%
Percentage contribution of
each margin to the fall in trade 2.68% 97.32%CentrePiece Winter 2010/11
26
This article summarises ‘Trade Crisis? What
Trade Crisis?’ by Kristian Behrens, Gregory
Corcos and Giordano Mion, CEP Discussion
Paper No. 995 (http://cep.lse.ac.uk/pubs/
download/dp0995.pdf).
Kristian Behrens is at the Université du
Québec à Montréal. Gregory Corcos is at the
Norwegian School of Economics and Business
Administration. Giordano Mion is a lecturer
in economic geography at LSE and an
associate in CEP’s globalisation programme.
Few systematic differences
within or between industries
Next, we analyse the fall in the intensive
margin of trade across the firm, country
and product dimensions to see if some
firms, industries, countries or products
were affected more than others. Our
analysis shows that the intensive margin
fall was driven by a generalised reduction
in demand for tradables as measured by
the reduction of GDP growth in the
destination markets.
Our analysis further reveals that
demand for consumer durables and
intermediate goods was more severely
affected than demand for consumer non-
durables. The remaining fall in trade is
explained by the poor financial health of
firms in the wake of the credit crunch and
their degree of involvement in
international value chains.
A comparable fall in
domestic operations
Finally, we consider changes in exports-to-
turnover and imports-to-intermediates
ratios at the firm level. This allows us to
compare the magnitude of the fall in
domestic economic activity with the
magnitude of the fall in international
trade. On aggregate, the ratios of exports
and imports to production did not fall,
confirming other evidence for OECD
countries (Eaton et al, 2009). Crucially, our
analysis reveals no cross-industry pattern
and no differences driven by firm
characteristics, indicating that finance and
disruption of value chains affected firms’
international and domestic activities
equally. 
Conclusion
Our investigation leads to the conclusion
that trade per se is not in crisis and so it
would be better to talk about a trade
collapse rather than a trade crisis. A
generalised fall in demand for tradables,
affecting international and domestic
operations with a roughly similar
magnitude, was the key shock. Further
investigation of what drove that fall in
demand is certainly needed, with sector
biases in fiscal stimuli, a fall in commodity
prices and product substitution by
consumers among the suspects.
Further reading
Richard Baldwin (ed.) (2009) The Great Trade
Collapse: Causes, Consequences and
Prospects, Centre for Economic Policy
Research
Andrew Bernard, Bradford Jensen, Stephen
Redding and Peter Schott (2009) ‘The Margins
of US Trade’, American Economic Review
Papers and Proceedings 99(2): 487-93
Jean-Charles Bricongne, Lionel Fontagné,
Guillaume Gaulier, Daria Taglioni and Vincent
Vicard (2009) ‘Firms and the Global Crisis:
French Exports in the Turmoil’, Banque de
France Working Paper No. 265
Jonathan Eaton, Sam Kortum, Brent Neiman
and John Romalis (2009) ‘Trade and the
Global Recession‘, mimeo
The trade collapse highlights the
extreme flexibility of business
relationships across firms, their
input suppliers and their clients

Trade crisis - what trade crisis?

http://cep.lse.ac.uk/pubs/download/cp336.pdf

Trade crisis - what trade crisis?

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