Breaking Down World Trade Elasticities: a Panel ECM Approach

Abstract

This paper exhaustively analyses the recent decline of international trade elasticities to output growth. We extend an empirical model of import demand functions to account not only for transitory factors, such as relative prices and import intensity-adjusted measures of demand (I-O Tables), but also for habitually neglected permanent factors such as protectionism, vertical integration (i.e. Global Value Chains) and foreign direct investment (FDI). Dealing with a non-stationary heteregenous panel of 27 countries, we estimate a panel Error Correction Model from 1960 to 2015 in order to break down world trade elasticities. Our main findings evidence: i) the presence of panel (cointegrating) structural changes in the trade-to-GDP relationship in 2000 and 2009, private consumption being a source of disruption; ii) although investment and exports are the most sensitive, import-intensive components of demand, this is far from being transitory, which is clearly weighing on the current slowdown; iii) the relevant contribution of GVCs shows a procyclical pattern, questioning the permanent nature of the current levelling-off of vertical integration processes. The lack of progress in reducing import tariffs and the usual discarded, complementary relationship between FDI and imports have a residual role. All in all, our results have substantial policy implications, as they reinforce the idea of a historical break towards a new 'normal' trading phase.

The Slowdown in Global Trade: A Symptom of a Weak Recovery?

“…As the goal of our analysis is to quantify the importance of these other factors in the recent trade slowdown, we use the average import content for each country. It is also worth noting that if import intensity were perfectly measured in each period and the import intensity weights were allowed to vary over time, the model would be able to fully account for the level of imports (although not their growth rates).9 See IMF 2015b,Jääskelä and Mathews 2015, Morel 2015, Hong and others 2016, and Martinez-Martin 2016 for further examples of analysis of trade growth based on import-intensity-adjusted aggregate demand, with substantially smaller samples of countries.…”

Trade facilitating and restricting measures and tariff rates in Latin America vs world economies

“…Weak trade growth can be explained by changes in aggregate demand, structural developments such as a low growth in GVCs, a possible rise in non-tariff protectionism and the declining impact of financial deepening (IMF, 2017b;IRC, 2016). The pervasive low trade-growth rates and international trade elasticities to output growth indicate a "new normal" where the high growth rates of the pre-crisis were an exception (Martinez-Martin, 2016).…”