“WHEN it comes to international trade, actually it’s not the Great Depression, it’s worse.” So said Paul Krugman in 2009. Global markets were certainly rattled by the financial crisis. Trade plummeted. Credit seized up, investors became nervous and consumers tightened their belts. And it became harder to shift bikes to Belgium and cotton to Canada. In the year following the collapse of Lehman Brothers the World Trade Monitor, an index created by the Netherlands Bureau for Economic Policy Analysis, saw a 30% drop.
Economists like Mr Krugman were worried that the world was repeating the mistakes of the 1930s. As the world entered the Great Depression, countries stopped trading. Import barriers were imposed by the dozen. Governments were under the impression that protectionist measures would save domestic jobs. And this worsened the crisis as the 1930s wore on, with exporters around the world going bust.
But the doom-mongerers might be proved wrong. Since 2009, trade has rebounded. Today, trade volumes are well above their pre-crisis levels. And the recovery is much more rapid than it was during the economic travails of the 1930s:
Jan 2008=100; June 1929=100 (source: World Trade Monitor, Eichengreen and O'Rourke (2009)
Trade has rebounded partly because countries did not become too protectionist. According toresearch by the Federal Reserve Bank of Chicago, the number of anti-trade measures implemented by the United States was less than one tenth of what had been predicted at the beginning of the crisis. The global economy avoided a scrappy fight over who could impose the harshest trade measures. As a result, free trade could rebound when economic conditions picked up.
Global institutions, such as the World Trade Organisation, should take some credit for the current state of affairs. Countries find it increasingly difficult to flout global trade agreements. But other factors are also at play. Historically, large-scale import protection occurs when a country’s currency is appreciating. A strong currency makes it cheaper to import goods and services—and galvanises governments to prevent it. But major economies like America and the eurozone have seen currency depreciations over the past few years. This meant that import protection was less necessary.
The trade figures may even underestimate the extent of the recovery. Jacob Kirkegaard, of the Peterson Institute for International Economics, reckons that since 2009, a higher proportion of global trade has been devoted to things that are very difficult to measure, such as tax services and e-commerce. Such services may ultimately not be measured at all, and this omission artificially depresses trade figures.
This measurement problem will get worse in the coming months. This is because economic momentum is currently shifting away from emerging countries, where exports are reasonably easy to measure, towards advanced economies, where problems of measurement are most acute.
But all is not rosy. Annual growth in global trade has been slower than growth in GDP for the past few years. Emerging market worries mean that world trade has declined over the past two months. And countries are not entirely immune from the disease of protectionism. Many are turning to the use of “local content requirements”—which stipulate that parts of the production process have to be domestic—to escape the attentions of regulatory bodies. These tricks may stifle trade liberalisation in the future. The "Trans-Atlantic Trade and Investment Partnership" now being negotiated between American and Europe will attempt to undo some of those protectionist measures, including "Buy American" rules and the like. Yet the macroeconomy is not on the negotiators' side; according to another paper, from the European Central Bank, the longer countries remain in the economic doldrums, the likelier they are to implement old-fashioned trade barriers.