Impacts, Transmission and Recovery
KDI/EWC series on Economic Policy
Edited by Maurice Obstfeld, Dongchul Cho and Andrew Mason
Chapter 7: The Great Trade Collapse and Contraction of Exports from Korea during the Global Crisis
Hangyu Lee INTRODUCTION During the 2008–09 global crisis, an unpleasant fact unfolded for many international economists. A large body of literature reported that world trade shrank far more than world GDP did during the crisis and argued that this fact cannot be easily reconciled with standard international macroeconomic theories such as Backus et al. (1995). The phenomenon is called “the great trade collapse”, reflecting the unprecedented size of contraction in world trade, and the jargon has become popular among international economists. Responding to this unpleasant fact, many international economists have proposed various explanations for it.1 Among them, the compositional effect, the internationalized supply chain and the trade credit hypotheses have been most frequently discussed in related literature.2 The compositional effect hypothesis notes differences between durable goods and nondurable goods and emphasizes a special role of durable goods in generating volatility of trade flow. It is a well known fact among macroeconomists that demand is more volatile for durable goods than for nondurable goods. Also, it has recently been reported that durable goods account for a larger share of world trade than of world GDP. The direct implication of these differences between two types of goods is that world trade can be more volatile than world GDP. The presence of an internationalized supply chain provides another hypothesis. It is based on the observation that the production process has been involved increasingly with the vertical trading chain across many countries over time. According to Hummels et al. (2001), the trade flow...
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