Trade, globalization and the financial crisis

Erasmus Kersting () and Mark Wynne

Economic Letter, 2009, vol. 4, issue nov, No 8

Abstract: The financial crisis that began in August 2007 and intensified in the fall of 2008 pushed the global economy into a severe downturn that some have called the Great Recession. The decline in trade and the protectionist instincts that invariably come to the fore in difficult economic times have raised concerns that today's crisis may lead to deglobalization. ; We will illustrate the crisis' impact on world trade and examine the typical patterns of international trade over the business cycle. We urge caution in using trade data to estimate the extent of globalization or deglobalization. And we present evidence that international trade has fallen by more than expected given the course of the current business cycle. ; This raises the question of what might have accounted for the excess decline. We look at two possibilities: first, a direct effect on trade flows associated with a drying up of trade finance at the height of the crisis; second, a breakout of protectionist measures. We conclude that trade finance is the most likely explanation. However, it's vitally important to remain vigilant to the risks of protectionism.

Keywords: International trade; Financial crises; Trade credit; Globalization; Business cycles; Recessions (search for similar items in EconPapers)
Date: 2009
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