The Great Collapse in Value Added Trade

Abstract

Reproduction permitted only if source is stated.ISBN 978-3-95729-221-6 (Printversion) Non-technical summary Research QuestionTrade is generally known to be more volatile than GDP growth even though standard economic models suggest that they move in unison. Nevertheless, the magnitude of the decline in world trade during the global financial crisis still posed a major puzzle to economists and became known as the great trade collapse. Numerous studies have looked into the factors behind the great trade collapse and the consensus that has emerged is that it can be mainly attributed to changes in final expenditure, inventory adjustments and adverse financial conditions. Here we re-examine the issue using a recently available global trade dataset and a structural decomposition analysis. ContributionThis paper differs from the previous literature in two important aspects. First, we focus on value added trade instead of gross trade flows. Value added trade captures in which country the particular parts of a final good were actually produced. Value added trade flows can differ substantially from gross trade flows due to trade in intermediate goods. Second, the use of yearly global input-output tables from the World Input Output Database (WIOD) allow us to consider changes in the international organisation of production as an additional explanatory factor of the great trade collapse. ResultsFirst, we show that changes in international production sharing accounted for almost half of the great trade collapse. Furthermore, we demonstrate that changes in international sourcing are common across the business cycle and more pronounced during downturns. Price effects appear to have played an important role for the collapse in value added trade accounting for around one third of the decline, but the relative contribution of changes in international production sharing to the decline in trade volume is the same as for nominal trade values. Applying our decomposition framework to the collapse in gross trade flows we highlight that the importance of changes in international production sharing for the variation in gross exports is even more pronounced than for value added exports due to the presence of foreign value added and double counting terms. Second, the global nature of our dataset and the use of a decomposition framework allow us to quantify the compositional changes in final demand that have been proposed in the previous literature. We find that the drop in the overall level of demand accounted for roughly a quarter of the decline in value added exports while just under one third was due to compositional changes in final demand. Third, we demonstrate that for value added trade all sectors were hit hard by the financial crisis and that the dichotomy between services and manufacturing sectors observed in gross exports is not apparent in value added trade data. This highlights that services sectors that are suppliers of inputs to direct exporters are likely to be much more vulnerable to external shocks than is generally acknow...

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