The collapse of global trade, murky protectionism, and the crisis:

The collapse of global trade, murky protectionism, and the crisis
anism. Households and firms suffer a decline in their incomes and adjust by reducing
their spending on imports. The point of departure from the standard mechanism is
that some of this reduced import spending is on imported vertically specialised
goods, say, personal computers (PCs). The lower demand for PCs immediately translates
into reduced demand by foreign PC firms for the imported parts and components
used to produce them. Some of these parts and components are made by US
firms. Consequently, US firms suffer an immediate reduction in their exports. Because
international trade in a world with vertical specialisation is directly linked to the production
chain, the shock is transmitted more quickly across countries. International
trade declines in a more synchronised manner than in the nonvertically specialised
world.
An additional channel comes from reduced spending on domestically produced
goods. The US may reduce its spending on goods "made in the USA," but which consist
of imported parts and components. If these imported parts and components
themselves are made from parts produced by US exporting firms, there again will be
a direct production chain transmission mechanism from US imports (i.e., foreign
exports) to US exports.
The example above also indicates that the decline in trade flows is a multiple of the
decline in demand for final imported goods. This is because trade flows are measured
as gross flows, not as value-added flows. Imported chips embodied in PCs that are
then exported are counted twice in the trade statistics, once as an import and once as
an export (as part of the PC).
Supporting evidence
The stories told above are quite stylised. An academic version of the vertical specialisation
mechanism is found in Burstein, Kurz, and Tesar (2008). An explanation based
on vertical specialisation in principle can account for some portion of the severity
and synchronisation of the collapse in global trade. Is there any supporting evidence?
There are at least two suggestive pieces of evidence. The first is that the collapse in
merchandise trade has been particularly acute in manufacturing. This is true whether
one compares manufacturing trade to nonmanufacturing trade within countries or
whether one compares countries with intensive manufacturing trade to countries
without intensive manufacturing trade. In addition, the collapse in manufacturing
production across the globe has also been sudden, severe, and synchronised. Finally,
manufacturing, in general, is much more vertically specialised than agriculture and
commodities. Hence, the vertically specialised nature of manufacturing could be a
contributing force to the larger collapse in manufacturing production and trade. 17
The second piece of evidence involves motor vehicle trade flows between the US
and its NAFTA partners. In 2008Q4, (nominal) US imports from its NAFTA partners
were down 23.2%, and imports from all other countries were down 19.6% from
2007Q4 levels. These two declines are fairly similar and consistent with a reduction
in demand by US households and firms for all types of motor vehicles. Turning to the
export data, US exports to all countries but NAFTA were 1.5% in 2008Q4 higher than
in 2007Q4. However, exports to the US's NAFTA partners were down about 20.1%,
very similar to the decline in US imports.
What is the reason for the disparity in export performance? The composition of US
17 Another reason for the large role of manufacturing is that many manufacturing goods tend to be
durable. Durability adds to volatility. See Engel and Wang (2008).
47