Presentation

on
International Trade

PRESENTED BY:- LOOMI PARMAR

 Topics

Banking crises and exports: -Lessons from the past

for the recent trade collapse
Follow the bouncing ball – trade and the great
recession redux
Banking crises and exports: -Lessons from the
past for the recent trade collapse

Supply-side effects of credit crunches on

exporters:-
 Exporters are likely to be more exposed to financial shocks
than domestic companies because international
transactions normally involve higher working capital
requirements and default risks
 Countries with more developed financial system gets less
affected compare to less developed financial system
Cont..

Evidence from recent banking crises:-

 The firms’ ability to finance their operations through internal cash
flow, their ownership of assets that could be used as collateral, and
their sector’s overall dependence on external finance.
 This first depends upon the general need for working capital. For
any given exporter, financing production-related variable costs
becomes increasingly difficult in a banking crisis period.
 The second is specifically related to exporting. New exports must
pay a sunk cost in order to penetrate foreign markets.
Cont..

 Export growth of a sector with a relatively high reliance on

external finance
 Exports of industries that are relatively more reliant on inter-firm
finance are less affected by a banking crisis
 Exports of industries that tend to have more tangible assets grow
relatively faster during a banking crisis

 The interpretation is that the inter-firm credit channel does not ‘dry
up’ when a banking crisis strikes the exporting country
Cont..

The importance of demand shocks during a

financial crisis
 Even though banks were not adversely hit in all countries, the
current crisis affected import demand in most nations
 when a banking crisis is simultaneously accompany by a drop in
demand, the exporters are hit twice.
Crises are not the same: Some countries are
hit harder
 The first result is that not all crises are the same; deeper crises
have more profound consequences.
Cont..

 we find that countries with a less developed financial system

(generally the poorer countries) suffer more during a financial
crisis.
 The impact on countries with less developed financial systems is
clearly more negative than on countries with more developed
financial systems
Implications for the 2008-2009 crisis
 First, focuses only on manufacturing industries, result do not
translate directly into conclusions regarding the effect of the
crisis on trade flows of agricultural products or natural
resources
 Second, focuses on the “relative” impact of the crisis on sectors
that are relatively more dependent on finance
Cont..

 The financial crisis that preceded the trade collapse can certainly
be considered a systemic crisis in various countries; it reduced the
confidence of financial institutions and sparked a severe credit
crunch.
 Our results suggest that the inter-firm financial channel does not
dry up in a crisis for exporters; we argue that is a consequence of
the fact that importers were not affected simultaneously in the
historical crises we studied.
 The financial crises were isolated events affecting one country, or a
small group of countries at a time.
 Third, A key characteristic of the current crisis has been a sharp
drop in demand, particularly in the US.
 Follow the bouncing ball – trade and the great
recession redux
 The focus has been on finding the cause, and the assumption has been
that the collapse in trade is unprecedented
 Inconsistent with the general level of economic downturn, and
indicative of a trade-related set of problems calling for trade-specific
solutions
 There may actually be two puzzles:
 The dramatic fall in trade as the recession deepened, and
 The apparent rebound in trade in the most recent data.
 OECD import growth (month on
month, 3-month moving averages)
Cont..

 In the emerging academic literature on trade and the crisis, the papers
closest to the points focus on the sectoral composition of the downturn
and trade.
 The increased sensitivity of trade to GDP swings includes increased
complexity in production
 That durable goods are most affected, historically, by financial
downturns
 The bursting of the housing bubble was identified as being most
responsible for the drop in consumption and imports, while the change
in the assessment of risk was largely responsible for the drop in
investment.
Cont..

 Also working with a CGE model, Bénassy-Quéré, Decreux, Fontagné,

and Khoudour-Castéras (2009) emphasize that a large part of the
recent drop in the level of trade is linked to price rather than volume
effects
 Willen bockel and Robinson (2009) also use a CGE model, focusing on
developing countries and the collapse in global commodity prices as the
downturn unfolded
Quarterly changes in US GDP and
exports, annual rate.
Cont..

 In the first quarter of 2009, GDP was down at an annual rate of 6.5%,
while exports fell 29.9% at an annual rate
 The production of goods was down at an annualized 16.4% in the fourth
quarter of 2008 and another 8.7% in the first quarter of 2009
 Services production, on the other hand, only fell at an annualized 0.9%
in the first quarter of 2009
 It is clear that the goods side of the US economy has been hit harder
than the services side, both in terms of production, and also trade
volumes
Quarterly changes in US goods exports
by major use category, millions 2007
dollars
Cont…

The key points are:

 Almost all of the drop has been in investment and durable goods, and
industrial supplies.
 Motor vehicles alone account for roughly one-third of the total decline.
Cont..

 The recession has been hardest on heavy manufacturing – machinery,

vehicles, and related raw materials
 This has translated into a deep manufacturing recession, and a
correspondingly deep drop in trade
 On the import side, roughly half of the drop in US import values at the
depth of the trade collapse was actually due to a drop in raw materials
like Oil
 The drop in motor vehicle trade actually maps almost exactly to the
drop in US production
China: structure of value added and
trade in 2004.
Cont..

The first column presents value-added shares, while the second and third
present export and import shares. The salient features are:
 Transportation and other services account for almost half (48%) of
value added in China, but only 11% of imports and 7% of exports.
 Mechanical and electrical machinery dominates both imports (41%)
and exports (40%) yet is only 9% of value added.
 Textiles and clothing, and resource-based manufacturing, account for
another 31% of exports, yet only 11% of value added
 In contrast, for countries where, for historical reasons, value added is
concentrated in industrial supply and machinery sectors (like much of
Eastern Europe), the impact of the recession on GDP has been much
greater.
 Detailed finding from the US auto
sector
US production and trade in motor vehicles, March 2007=100
Cont..

 The sectoral level, we have an almost exact mapping between trade and
production trends.
 The collapse of US trade in motor vehicles corresponds to the global
crisis in the vehicles sector
 Because the motor vehicle sector is a large share of US trade, this has
also helped drive the collapse in total US trade (see also Figure 4)
 Indeed, the recovery of US vehicle trade in the third quarter of 2009 –
as restructuring has progressed and credit lines have been re-
established has also contributed to almost half of the annualized 21.4%
increase in US goods exports in the third quarter of 2009.
 Remaining risks of protectionist
pressures
 There may be risks for protection on the upside of the trade cycle that
did not materialize on the downside
 Antidumping regimes are backward looking, using recent trends in data
to establish causal links between injury and trade
 Recession linked to a deep credit crisis – it is important to maintain a
rearguard action on the import protection front
Thank you