Extract

Global trade fell during the global economic and financial crisis at a pace unseen since the 1930s. While trade adjusted mostly in volume terms in the countries mainly exporting manufactured goods, commodity exporters experienced a sharp drop in their terms of trade. In both cases, demand came under pressure because of the synchronized fall in export value on top of a sharp drop in the value of assets. The fall in demand was a major factor behind the fall in world trade. Still, the fall in aggregate demand alone appears insufficient to explain the size and steepness of the fall in world trade. As a matter of fact, the elasticity of trade to gross domestic product (GDP) was the highest in the post-World War II period. Other explanatory factors are therefore needed. One of these is the specific effect the financial crisis had on trade in capital goods, a category that has a relatively large share in traded goods. This is the composition effect. While manufacturing has a high share in traded goods, it is also a sector that is vulnerable to the (non-)availability of finance for its working capital because of an increasingly high degree of vertical specialization in world production. The segmentation of the production chain is likely to have made this chain more reliant on external finance, more vulnerable to volatility in financial markets including exchange rate volatility, and may have increased its total need of financing for working capital. Also, trade finance was probably a contributing factor,2 even if it is hard to determine whether demand or supply factors prevailed in the decline in trade finance.