Global Trade Survives Recession

Trade today reminds me of the story about the man who asks God whether his virtuous life has guaranteed that he will go to heaven. God replies: "I have good news and bad news for you. The good news is that you are indeed going to heaven. The bad news is that you are going there tomorrow." As we contemplate the future of world trade, which was devastated in the immediate aftermath of the twin crises on Wall Street and on Main Street, we have good and bad news concerning the prospects for a robust, open world economy.

There was much concern because trade volume had collapsed faster than world income. Did this imply that protectionism was breaking out? Were we backing into the 1930s with their spread of protectionism that accentuated the devastation caused by the Great Crash of 1929?

Not really. The main proximate reason was instead that world trade had been growing faster than world income in the previous quarter of a century. So, if we went into reverse, trade would fall faster than income.

But why was trade growing faster than income? The principal reason was that production was getting internationalised, with multinationals often shipping products in different stages of assembly around the world. This was a trend facilitated by the progressive dismantling of trade barriers, of course. But it also meant that the measured value of trade to GNP would rise immensely because of the fact that trade is measured by sales, i.e. by gross value, whereas GNP is the measure of "value added".