Summary
1. The Chinese authorities have rightly taken the strongest possible stance against protectionism.
2.
While such a stance is correct it is necessary to have an accurate
estimate of the objective evolution of world trade as far from all
elements are under the control of China itself. The chief conclusions
which emerge from such a study are serious and clear.
3.
The current decline in international trade is of much greater
dimensions than any seen since World War II. The only scale of
comparison approaching it is 1929. As regards the current speed of
decline of trade, although not, of course, as yet in its duration, the
current fall in trade is so far actually more rapid than at the onset
of the Great Depression after 1929.
4. Given the magnitude of
this trade decline there is no justification for any view that there
will be a short term recovery of trade or any recovery of the world
economy in the second half of 2009.
5. Based on present trends
a favourable estimate of the time it will take for world trade and
China's exports to recover to previous levels is three years. However
the situation is continuing to deteriorate and this timescale may be
too short. This minimum three year recovery period must therefore be
included in forward planning.
6. The severity of the decline in
trade means that contingency planning for all countries, including
China, must therefore be based on examination of more unfavourable, and
not more favourable, scenarios than those currently envisaged.
The
reasons for these conclusions will become clearer if the present
situation of world trade is briefly placed in the more general
framework of the unfolding of the international financial crisis.
The Chinese authorities correct stance against protectionism
The
Chinese authorities have rightly taken the strongest possible stance
against protectionism since the beginning of the international
financial crisis. This consists not only of positions at international
meetings, and in public statements, but practical measures such as the
dispatch of trade delegations, simplifying procedures for Chinese
companies to invest abroad, boosting trade with Taiwan, making possible
trade in RMB with Hong Kong, and similar steps. Such policies will
clearly continue to be necessary.
While such a stance is
correct far from all elements of the international economic situation
are under China's control. It is therefore necessary to have an
accurate estimate of the objective evolution of world trade. Other
countries may simply be overwhelmed by objective factors, given the
severity of international financial trends, or lapse into protectionist
policies. This article, therefore, considers current declines in
China's trade in an international context and placing it in a
comparative historical context. The chief conclusions which emerge are
serious and
clear.
The current decline in
international trade is of a severity that substantially exceeds those
of 1973 - following the first oil price increase crisis,1981-82 -
during the US Volker-Reagan recession, or in the 1997 South East Asian
devaluation and debt crisis - i.e the current decline in trade is of
much greater dimensions than any seen since World War II. The only
scale of comparison approaching the current decline of world trade is
1929. As regards the current speed of decline of trade, although not of
course as yet its duration, the current fall is actually more
rapid than in the onset of the Great Depression after 1929.
Current declines on international financial markets
In
order to assess the current trends in the international economy it is
important to understand the real dimensions of the decline in financial
markets. To do so Figure 1 compares the decline in the Dow Jones
Industrial Average during the current crisis with that following 1929 -
i.e in comparison with the most serious financial crisis so far in
economic history. The graph shows the percentage decline of the Dow
Jones Industrial Average compared to the peak in the preceding cycle,
in both 1929 and 2007, measured against the number of trading days
since that peak. As may be seen the rapidity of the decline since 2007
almost exactly follows that after 1929.
Figure 1
In
order to illustrate that this current rate of decline in share markets
is in no way typical of a cyclical decline Figure 2 also shows the
similar rates of decline of share prices during the other two major
stock market falls of the 20th and 21st centuries - i.e following the
oil price increase of 1973 and following the bursting of the dot com
bubble in 2000. As may be seen the share price declines after 2007 and
after 1929 far exceed the falls in 1973 and 2000, making clear that the
only suitable point of comparison as regards financial markets for the
current crisis is with 1929.
Figure 2
It
should also be noted that, as shown in Figure 3, the rise in share
prices on Wall Street in recent trading did not break out of this
declining trend. The shift so far has simply moved the rate of descent
of US share prices closer to the declining trendline that has been
operating since October 2007 after several weeks of even more rapid
than average falls.
Figure 3
The situation of world trade
Having
established that current falls on share markets greatly exceed in scale
any seen since World War II it may be rapidly established also that
current trade declines also far exceed in scale any seen since World
War II. Furthermore, as will be seen, trade plays a major role in
assessing the scale of the present economic crisis in regard to the
relation between the speed of decline in financial markets and the
development of the situation in the productive economy.
Whereas
present rates of fall on financial markets are comparable to 1929 most
published data on the productive economy indicates a lesser rate of
decline – i.e. there is a disparity between the two indicators. An
exception is the annualised figures for US GDP for the 4th quarter of
2008 for investment, exports and imports which do indicate rates of
declines of post-1929 dimensions. However, the annualised figure for US
GDP itself for the 4th quarter of 2008
indicates a rate of economic contraction about two thirds as fast as in 1929.
However
part of this apparent difference between financial and productive
economy indicators can be that while financial markets may be followed
in real time there is a delay in the calculation and publication of
statistics on the productive economy. Current rates of economic decline
are sufficiently rapid that delays between the actual current situation
in the productive economy and the publication of data regarding it may
lead to significant distortion in the picture presented in some
statistics.
This is most serious in the case of GDP data.
This is, first, based on data over a whole quarter and second it is
necessarily published with delay due to the time taken to calculate it.
Revised data for US 4th quarter GDP figures only became available at
the end of February and, as monthly GDP data is not calculated it did
not indicate the speed of change during the quarter itself - it is
known from other measures that the rate of economic decline was
accelerating significantly during the quarter. For that reason other
indices than GDP, which are available more rapidly and on a more
frequent basis, may indicate more accurately, if more partially, actual
trends. Industrial production data, however, which is frequently taken
as a more recent measure of economic shifts may be misleading in
countries which are heavily dominated by
service sector activities.
One
of the most important of available data sources is trade. This
furthermore relates directly to one of the key issues in the current
economic downturn – globalisation and protectionism. During
periods
of severe recession a process of trade ‘de-globalisation’ frequently
occurs – i.e. exports and imports fall more rapidly than GDP and
therefore trade contracts as a percentage of GDP. The most extreme case
of trade ‘de-globalisation’ was following 1929 - when the decline in
exports and imports was far greater than that for GDP in the US and
other economies and was exceeded in magnitude only by the fall in
investment.
A similar pattern of the falling share of trade in
GDP, on a much smaller scale, was seen during the most severe
post-World War II recessions – for example in the US in 1981-82.
The scale of the current decline in world trade
To
assess current trends in world trade Figure 4 shows the year on year
decline of exports for Organisation for Economic Cooperation and
Development (OECD) member countries. As these account for the majority
of world trade, and the main non-OECD economies such as China are
considered below and show the same pattern, these trends clearly
reflect the overall situation of world trade.
The trend shown
in Figure 4 is clear. The year on year decline in OECD exports to
December 2008 was 18.9 per cent - the most serious in the period since
World War II.
Figure 4
Moreover
world exports were declining sharply during the last three months of
2008, after having risen strongly, at the beginning of the year. The
year on year comparison therefore understates the rapidity of the
decline in trade at the end of the year. To illustrate this latter
trend Figure 5 therefore shows the fall in exports for the last three
months of 2008 on an annualised basis. The 64.5% annualised rate of
decline of OECD exports for the last three months of 2008 far exceeds
any fall seen in post-World War II history.
Figure 5
Given
that the current decline in world trade considerably exceeds in
magnitude any seen since World War II comparisons only with previous
post-World War II recessions are misleading in that they significantly
understate the dimensions of the fall.
Taking as a benchmark the
most serious trade decline in world history, that following 1929, casts
the magnitude of the present situation in a clearer light. Such
comparison indicates that, as regards a whole series of countries, the
current decline in trade is more rapid than that following
1929. If that process were to continue for any significant period of
time the consequences, both in terms of the recessionary pressures that
are implied and in terms of ‘de-globalisation’ and the rise of
protectionist trends, would be extremely significant. These trends in
trade, therefore, also provide some evidence that the deep pessimism in
financial markets, with post-1929 speeds of decline, may be justified
by events in the productive economy.
To give an initial
benchmark Table 1 shows the decline in exports for countries for which
data is available both for the total decline in exports in the period
1929-33 and in the first year
following 1929. The data is measured
in current prices to make it comparable with the most recent data for
the decline in exports from 2008 onwards. As may be seen all countries
suffered major export declines in 1929-30 - the most severe
contractions being in the UK, Canada, the US and Japan with,
respectively, annual falls in exports in 1929-30 of 19.3%, 20.9%,
22.5%, and 28.1%. The US also suffered the most severe decline for the
period 1929-33 as a whole - with a total decline in exports over a four
year period of 66.2%.
Table 1
Current declines in world trade
The
latest figures released by the Organisation for Economic Co-operation
and Development (OECD) for world trade up to December 2008, with data
for more recent months in the case of certain states, allows the
calculation of a relatively comprehensive picture regarding world trade
for the major economies. The pattern is extremely striking. The rates
of decline of world trade in many case are more rapid than in 1929 and
in a number of cases the decline in trade since 2008 is already
approaching the declines for the 1929-33 period as a whole. In short
the contraction of world trade is today of extreme rapidity.
Due
to the extremely rapid shift in the situation three indicators have
been calculated for exports – the actual year on year decline to
December 2008, the actual decline in exports since the peak month for
each country or area last year, and the change during the three months
to December 2008 on an annualised basis.
In order to give a
year by year historical scale of comparison the decline of US exports,
in current prices, was 22.5% in 1929-30, 32.7% in 1930-31, 32.4% in
1931-32 and 4.0% in 1932-33 after which partial export recovery
commenced - i.e. the most rapid annual rate of decline of US exports in
the Great Depression, and the most rapid on record to date, was 32.7%
in 1930-31. By 1933 US exports, as noted in Table 1, had fallen 66.2%
below their 1929 level.
Considering first the OECD area as a
whole, Table 2 sets out in more detail data already illustrated in
Figures 4 and 5 and also analyses the situation in the OECD European
region. As can be seen, for the OECD region as a whole exports have
already declined by over 30% since their peak in April 2008 -
essentially equalling the rates of decline of the worst year of the
1930s and exceeding the decline of US trade in 1929-30. The annualised
rate of decline in the three months up to December 2008 was 64%.
For
the major G7 economies the decline was only slightly less severe - with
a decline of 26.9% since the peak in July 2008 and an annualised rate
of decline of 57.8% in the three months to December 2008.
Within
the Euro area the annualised rate of decline for the three months to
December 2008 was 50.4% and for the OECD European region, which
includes some East European states, the annualised rate of decline was
67.0%.
It may therefore be clearly said that in the field of
trade, as in that of financial markets, the current decline is full
comparable in speed of descent to the onset of the Great Depression.
The difference, so far, is not in the speed of fall but in its duration
- the decline in exports after 1929 continued for four years whereas so
far the current decline has been occurring for a year. It remains to be
seen for how long the current decline with continue.
Table 2
Turning
to individual countries, Table 3 shows the figures for the largest OECD
economies - the G7. As may be seen all G7 countries have seen declines
in exports of over 25% since their peak levels last year and in the
three months to December 2008 all witnessed annualised rates of decline
of more than 50%.
In short, the precipitate decline in world
trade, at 1930s rates of descent, is not confined to smaller economies
but fully affects the largest ones. The actual decline in trade in all
G7 countries since the peak in 2008 is greater than the fall in the US
in 1929-30.
Table 3
Table
4 shows the rates of decline of exports for the non-G7 European OECD
states. As may be seen with the exception of two small economies,
Luxemburg and Ireland, which have done better than others, all OECD
European countries have seen actual export declines of at least 25% and
annualised rates of decline of 50% or more. Again the actual decline in
trade since the peak in 2008 is already greater than for the US in
1929-30.
It is possible that the rate of decline for Spain, an
incredible 99.7% annualised rate in the three months to December 2008,
is a statistical freak or error but the annualised rates of decline for
Sweden, Poland, and Norway are almost as severe - respectively 79.1%,
82,8%, and 83.1%. Such rates may rightly be characterised not as
decline but of collapse of exports in at least the short term.
Table 4
Turning
to non-European economies, the data is set out in Table 5. Again, with
the exception of the small economies of Iceland and New Zealand, the
highly publicised decline of Chinese exports by 22.3% since their peak
last year year, and at an annualised rate of 53.0% in the three months
to December, are themselves actually significantly smaller than for
other countries. Mexico and South Korea have already seen actual
declines of exports of over 30% and South Africa and Turkey have seen
falls of over 40%. The annualised rates of decline of exports for South
Korea, Brazil, Indonesia, South Africa, and Turkey - at 70.7%, 72.4%,
78.2%, 82.1%, and 90.1% respectively - are clearly catastrophic.
Table 5
Countries
for which OECD data is available for January confirm continuation of
the same trend – as shown in Table 6. The chief difference is that with
the extra month the actual declines in exports, as opposed to only the
annualised rates of fall, have become more serious.
The
actual falls recorded from the maximum levels of exports are 29.8% for
Switzerland, 41.1% for South Africa, 41.4% for Sweden, 46.3% for Norway
and 47.5% for Turkey. There is nothing in this pattern which indicates
results for other countries are likely to show an improved tendency.
Table 6
Summary of the current rends in world trade
Summarising
the above data, of the 34 countries studied 14 had annualised rates of
decline of exports of more than 70% and 20 had rates of decline of more
than 60%. The widely publicised reports of declines of exports in the
last three months of last year such as the annualised 51.9% for Japan,
53.0% for China, or 54.0% for the US, which attracted much publicity,
are actually smaller than the falls in most countries.
While
the annualised rates of decline show the extremely striking implosion
of world trade during the last three months of 2008 an annualised rate,
naturally, indicates an, in this case extremely severe, tendency. What
is equally disturbing is the actual falls in exports recorded from the
maximum levels last year. Seven countries registered actual falls in
exports of more than 40% and 19 of more than 30%.
The relation of the decline in financial markets, trade and the productive economy
The
transmission mechanisms of the financial crisis into the productive
economy are also made clear by the trends outlined above. Initially in
the present crisis there was a disjunction between the decline in
financial markets, which was of 1929 magnitude, and the situation of
the productive economy - which was of a severe but not equivalent
decline. As such a disjunction is highly unlikely to continue either
financial markets would recover, having overshot on the downside, or
the trends and statistics in the productive economy would be shown to
have been a lagging indicator and they would adjust downwards to the
tendencies indicated in financial markets.
The
extraordinarily powerful falls in world exports shown in the latest
figures for all major economies indicate that the decline in trade is
operating as a key mechanism by which the crisis revealed in financial
markets is beginning to affect the productive economy. It may now be
said that in two areas of the world economy, financial markets and
trade, rates of decline significantly exceed any seen since World War
II and are fully comparable to 1929 scale. How powerful the
transmission mechanisms from the international sector are into domestic
economies must clearly be carefully studied - trade today plays a more
significant role in the world economy than at the onset of the 1929
crisis.
The duration of the crisis is also critical - the so
far unique severity of 1929 was not only due to the rapidity of the
fall but by its duration. The decline in US trade and GDP in the 1930s
continued for four years whereas the current decline in financial
markets has lasted 17 months, the decline in trade slightly under one
year, and the fall in GDP approximately six months.
Quite
sufficient data are now in to say with certainty that in the last three
months of 2008 a convulsion in world trade occurred. The extreme
rapidity of the fall in world trade, as with the situation in financial
markets, confirms that the benchmark for present analyses must be not
only, or primarily, post-World War II recessions but also 1929 itself.
Perspectives for China's exports
The above international situation provides the framework for estimates of perspectives for China's exports.
As
may be seen from the figures above China's export decline is not
exceptional by the standards of current trends in trade - on the
contrary China's decline in exports is moderate compared to most
countries. This makes it extremely unlikely that the decline in China's
decline in exports seen since last year is due to some exceptional
factor that can be easily reversed. On the contrary China's decline in
exports is inextricably tied to trends in the world economy and depends
on recovery in the world economy.
Figure 6 shows the trend in
OECD country exports in dollar terms - Figure 7 shows the same data
graphed on a log axis to show the rate of change. Both confirm that the
decline in international trade since April 2008 is without precedent
since World War II - the period covered includes both of the severe
post-war trade crises in 1973 and 1981. As this unprecedented decline
is not rooted in specific policies pursued by China it cannot be
reversed by specific policies adopted by China.
The logarithmic
graph also shows that there are no major 'leaps' in the growth of world
trade i.e periods of extraordinarily rapid expansion. This is crucial
as it indicates that recovery from any decline in trade cannot be
immediate - it is rooted in the periods of time necessary to develop
trade volme. Therefore, given the magnitude of the decline in exports,
recovery from the present extremely severe decline in world trade will
necessarily not be rapid.
Figure 6
Figure 7
This
development of OECD trade also gives a framework for assessing China's
trade - which is itself shown in Figures 8 and 9. To show both the
absolute shifts and the rates of change Figures 8 and 9 again use both
linear (Figure 8) and logarithmic (figure 9) axes. The again show that
there are no 'leaps' in the expansion of trade - i.e. any recovery will
take a significant period of time (technically R2 is greater than 0.9 for the correlation between time and trade value).
Figure 8
Figure 9
In
order to assess how long it will take China's exports to recover it may
be noted that by January-February 2009 China's exports had declined to
the level of the same period in 2006. Given that there is no evidence
in the long term data of any possibility of radical upward 'leaps' in
trade for either the OECD or China a reasonable working hypothesis
would be that it will take China's exports at least three years to
regain the level of August 2008.
However, it should be noted
that the situation of world trade is continuing to deteriorate. The
three year recovery period for China's exports flowing from this
international data to December 2008 may well be, therefore, too
optimistic. This again confirms that the working hypothesis should be
that, based on trends within world trade, it will take at least three
years for recovery of China's exports to their previous levels.
The
implications for China's companies, economy and domestic stimulus
programmes of the above trends are evident - if it is estimated that at
least three years will be recovered for China's exports to recover to
their levels of summer 2008 then planning for all three must take place
on that basis.
Conclusion
Analyses which
focus on comparisons with trade declines since World War II are too
optimistic as the present decline in world trade far exceeds in its
dimensions any seen since 1945. The present rate of decline of world
trade is actually more rapid than in 1929 - although, of course, the
duration of the fall is so far, of course, far shorter. Given such
trends any perspective of rapid recovery of China's exports is
excluded. The working scenario should be that it will take at least
three years for China's exports to recover to their previous levels. If
current trends of decline of world trade continue that period would
have to be lengthened. Company and economic planning should, therefore,
take place on that basis.
Notes to Tables - peak month for exports in 2008
1. Peak January 2008
2. Peak March 2008
3. Peak April 2008
4. Peak May 2008
5. Peak June 2008
6. Peak July 2008
7. Peak August 2008
8. Peak September 2008
