Global Trade Declined by 12% in 2009

According to the World Trade Organization, global trade plummeted by 12% last year. The Guardian says this is the fastest pace of trade contraction since World War II. The fallout of the financial crisis has thrown world trade off course. It might not be easy get back to the previous level of trade either.

Global trade is good for everyone involved. For developing nations, it's especially important because they can often produce goods more cheaply than more developed countries and experience significant growth through exports. The more advanced economies enjoy cheaper goods thanks to those developing nations. When trade suffers, everybody is worse off.

How did the financial crisis cause such a big problem for trade? The major source of the trouble comes from the demand side. Firms and individuals aren't spending the way they were prior to the crisis. Unemployment is higher than usual in some countries, especially the U.S., and that constrains consumer spending. Shaken firms are hoarding cash and buying less.

On the supply side, it might not seem too bad: interest rates are relatively low. But as just mentioned, many businesses aren't spending, so they have no need to borrow. Some of those who might be willing to spend more aren't finding credit as easy as it used to be, with lenders having stricter underwriting requirements than before the crisis.

The Guardian reports that WTO head Pascal Lamy suggests more progress in the latest Doha round:

Completing the Doha round, which has already lasted more than eight years, could help to open up new sources of revenue for recession-hit countries, and kick-start a world recovery, he said.

Making trade easier would certainly help, practically by definition. But I see its effect as potentially minor: until consumers and businesses decide to start spending again, demand won't rise. And without greater demand, more abundant supply can only do so much.

Unfortunately, it might just take time. Once the battered economies improve, demand will as well, and trade should recover. Until then, it will remain weak.

(Image: Wikimedia Commons)