Tough Times for Trade

When the financial crisis hit the world in the fall of 2008 most sectors of the economy came crashing down with it. International trade was no different, and by some measures the decline was more pronounced. When world GDP began to contract and hit its bottom in 2009, exports dropped nearly 30%. One would expect a certain amount of withdrawal when a crisis of this magnitude hit but with such a huge drop off the question arises what other factors could have played in? The answer is not as simple as it may seem.

Global trade does not perfectly mimic the global economy and many factors play into its expansion (rising from 22% to 33% of world GDP from 1996 to 2008) and the more severe contraction of the past few years. One of the main reasons for this contraction is the meltdown experienced in the credit market. Many exporters rely heavily on banks to bridge some of their expenses. They deliver goods to the end user or intermediary before they receive payment. This creates a lag that is filled by short-term trade—finance loans and is a crucial component of how many international businesses operate. When credit dried up this had a compounding effect on trade, making it much harder to access capital.

Another issue that could plague global trade is if the rhetoric of trade barriers comes to fruition. The United States alone is beginning to have a dangerous flirtation with trade wars. The presidential election season has seen an increase in tough talk that could result in labeling China a currency manipulator which paves a road for introducing harsh trading terms with a country that supplies the U.S. with numerous goods. The end of last month brought up the possibility of another trade war for the United States—this time with Mexico. The issue stems from indications that the U.S. Department of Commerce may be willing to end a 16-year-agreement with Mexican tomato growers that has kept prices low. This sparked rhetoric from the Mexican government of possible retaliation which could quickly evolve into a full-blown trade war. On top of all this Brazil announced that it would raise tariffs on 100 products to fend off some of the competition that it is feeling.

So where does this leave international trade? Certain steps must be taken to help boost trade. While Europe is struggling to recover and credit remains hard to obtain, Japanese, Chinese and even Brazilian banks are helping to fill holes in short-term credit. The harder problem deals with the tariffs and trade wars that seem ever more possible and the complexities that international politics bring to trade. These tensions must be defused. With the lagging economy and the impact that global trade has on world markets is too important for there not to be solutions.