1. The Chinese authorities have rightly taken the strongest possible stance against protectionism.
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.
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.
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.
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.
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.
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%.
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.
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 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.
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.
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.
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.
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).
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.
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.
This analysis was prepared for Antai College of Economics and Management in Jiao Tong University Shanghai. It originally appeared in Chinese and English on China in the International Financial Crisis.
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