In this paper I will elaborate on what effect did the financial crisis of 2008 have on trade and the main correlations between the two that made the most impact. As the Great Recession, as economists across the world call it, slowed the economy of where it all began down, we have come to realise how connected and globalised the world is by looking at the immediate consequences all around the world. Furthermore, even though very similar to the Great Depression (1929-1933), the most recent crisis, also caused by wayward banks, is much more costly in terms of trade. The sectors in the developed countries that suffered the most were the automobile, durable industrial supplies and capital goods sectors, trade fell by double digits in most parts of the world, developed and developing, later mainly dependant on FDI flows and direct trade
Most obvious thing during the financial crisis is that the imports fall and the countries want to export their way out of the crisis, but in a world that we live today that is hardly possible because of the dependancy countries have on one another and the fact that no country in this word is self sufficient. By export strategies countries drive themselves into trade surpluses which drives factors like IMF and Central Bank into the picture. Big players like the United States do not want to be submitted to the outsider control.
This all paints a new picture of the free trade, that tells that no matter how helpful to everyone around the world when hit by a financial crisis all the weaknesses come up to the surface. Moreover, even though greatly beneficial the whole system is immensely fragile and dependant on factor that will be further elaborated on in this paper.
The main goal of this paper is to present a timeline of the events backed up by the empirical evidence supporting the facts of the Great Recession.
Duration of the Financial Crisis
Before the hardest hit of the Financial crisis that mostly affected merchandising trade rather than service trade the world was hit by a turmoil in the commodities trade. Namely in 2007 and first quarter of 2008 prices of food and oil rose significantly, wheat and rice prices almost tripled, bringing fear into most countries and causing banning of export on staple commodities in order to preserve low prices inside the economy. Prices of oil in 2007 went up by 50% affecting, among other things the agriculture industry (fertilisers derived from natural gas) deepening the fear of high prices of food and strengthening reactions of countries to close their economies to the outside world.
A chain reaction started by Lehman Brothers in the United States affecting essentially everybody around the world that had any financial connection with the United States no matter if once or four times removed. Many developing and emerging countries dependant on the export suffered considerably starting 2008 reinforced with the shock in commodities prices they suffered moths earlier.
Considering where it all started, financial markets, namely lenders and borrowers suffered in the first wave of the crisis so the World Bank, Fed and the IMF start to intervene beginning the last quarter of 2008 which puts big influencers like The United States and the European Union into deep recession, essentially setting the whole world back putting growth rates of the emerging and developing countries at their lowest in the period of 25 years.
On the other hand, Bank-intermediated trade finance was affected in another manner. The share of the world trade supported by this way increased during the crisis mainly because they did not deal with specific problems in these trade markets.
However, the value of trade fell down significantly, hitting the 50% mark decline in some cases. Contrasting to the Great Depression there were no «deals» to deal with the direct consequences of the Great Recession like growth of unemployment and general economic downturn including trade. Organisations like (and mainly) World Trade Organisation (WTO) are responsible for regulating the members on a global level through a hardship of a crisis, with an exclamation point on being proactive rather that reactive to the situations happening and be ready to deal with the situations on an earliest notice.
The Great Recession plunged Both imports and exports on a global level during the 2009 from $16 to $12.35 trillion and imports from $16.5 trillion to $12.7 trillion. The growth that was at about 30% before the recession slowed down to 16% post, concluding the earnings from the trade being halved by this crisis.
Recovery after the Crisis
After the crisis settled the effects of it could still be felt even today. As shown in the Figure 6 unemployment only made a move for the better in 2016. General demand is reduced on aggregate level curbing both imports and exports (Figure 7, Figure 8). Right after the crisis people are less likely to indulge in luxurious products and services like cars and tourism. Figure 9 shows the fall of car registrations in Great Britain especially plunged during the years 2011 and 2012, after the Global Financial Crisis.
Main Drivers of the Financial Crisis
From all the data gathered from the most impactful crisis of the century we can separate the main drivers that fuel the crisis and take it to the global lever impacting the richest and the poorest economies in the world.
First to blame is globalisation as such, because of it the crisis can not stay isolated and spreads in form of a plague. Even considering this fact, globalisation is also the driver of countries getting richer.
- Purchasing power in the export markets dropping leads to losses in the exporting world in form of less earnings and job losses
- The debt situation of a country when the crisis hits decides if the country is going to get poorer by borrowing more in even worse conditions
- The value of exchange rates, as it will be further discussed later in the text
- Diminishing credit for trade
- Withdrawal of the PI and FDI declines
- Preventative measures to help developing world from the mistakes of the rich
This all proves that trade joined with free movement of capital fortifies imbalances across the economy. Following that capital goes where there are the most earnings, during the crisis it goes away from the countries that need it opposing to big players like the United states, European Union and similar, they now lack the productive credit. On the other hand the emerging economies are taking in big capital inflows because the returns on investments like this in developed countries and strong economies are very low and because of that the exchange rate in these countries grows.
Even though, in this case, for example the United States, is printing money to enhance their own economic system, these dollars are leaving their home country and flowing into other countries of considerable economic growth with liberalised capital account. Taking into the account that trade agreements keep the trade liberalised and because everything else these emerging economies like Brazil and South Korea are imposing currency and capital controls to stop the exchange rate from increasing. Nevertheless, the rules on these kind of movements in FTAs and WTO forbid use of capital controls as preventative measures.
Furthermore these capital flows are stimulated by hedge funds and similar to them and financial operators like carry and derivatives traders who are still protected by the services (financial) agreements in the free trade.
All these reasons do not help emerging and developing economies that find themselves in situations like this. Because of that they need to maintain policy space to protect themselves from the gaps like this that only help the richest countries. At least selected FTAs should be reviewed and updated so the preventative measures agains backlashes could be taken. Regulation of financial services should also be revisited so they are tightly regulated and supervised.
The common goals between the signees of the Free Trade Agreements should not be trade just as it is but mutually helpful, sustainable production, trade and consumption that benefits each party. Moreover, in case of a crisis of this scale there should at least be a Free Trade Deal.
Following the timeline of the crisis this paper has shown that crisis on a global scale could and should be prevented in order not to go backwards and keep as much of the world out of poverty with the biggest help of Trade and Globalisation.
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