Will the corona pandemic lead to a decline in world trade?

For a long time, there was nothing but growth in the development of cross-border trade in goods. The financial and economic crisis in the wake of the Lehman bankruptcy dealt a blow to this development, which saw itself weakened even after the rapid economic recovery. Not only is a stagnation of world trade to be expected if this trend should continue after the corona pandemic, but even a decline.

The long term: Fall of the Iron Curtain as a boost for global exports

With the end of the real existing socialism and the integration of the Eastern European economies into the world economy, an intensification of the international division of labor began. As a result, exports of goods also increased more strongly than before the fall of the Iron Curtain. A look at the level of annual merchandise exports by the USA and Germany between 1948 and 2019 shows this in an exemplary fashion (see Fig. 1).

However, Figure 1 also shows that exports were subject to fluctuations between 1991 and 2019. A central reason for a dampening of export dynamics is the two economic crises in the new century, i.e., the recessions following the burst of the dotcom bubble and the Lehman bankruptcy.

Economic crises and exports in the USA

US exports of goods increased between 1991 and 2000. In 2001 and 2002, they declined because of the economic crisis in the wake of the dotcom bubble in combination with the terrorist attacks in the USA on September 11, 2001.

In the phase of economic recovery from 2002 onwards, American exports grew more strongly than in the phase before. The global recession triggered by the Lehman bankruptcy led again to a sharp decline in exports. In the course of the rapid global economic recovery, U.S. exports rose strongly in 2010. After that, (between 2011 and 2019) the average annual increase in exports was weaker than in the phase between 1991 and 2001 (see Figure 2).

Economic crises and exports in Germany

Germany’s merchandise exports developed similarly to those of the USA. However, between 1991 and 2002, German exports were less dynamic than in the USA. Developing an efficient infrastructure in the former GDR meant that the German economy needed a larger share of domestically produced goods. This meant that fewer goods were available for export. In the phase from 1991 to 2001, Germany had a current account deficit.

After infrastructure development in Eastern Germany was largely completed in 2001, German exports rose sharply between 2002 and 2008. The global economic crisis in 2008/09 slowed down exports – as in the USA – from 2011 onwards.

Economic crises and slowdown in exports

An economic downturn curbs exports through two main channels:

1. A decline in production and employment in a country results in a drop in income. This reduces the demand for goods – both from the domestic market and from abroad. Exports from abroad consequently decline.
2. In a severe economic crisis, governments often try to protect production and employment from foreign competition to prevent an even greater economic slump. Introducing trade barriers due to the recession reduces imports. This means a decline in exports for the affected trading partners abroad.

The extent of the export-dampening effects of an economic crisis, therefore, depends largely on the extent of the economic slump caused by the crisis, how long the economic recovery takes and how quickly the trade barriers introduced during the recession are dismantled again. The developments outlined in Figures 2 and 3 suggest that there are differences in this respect between the dotcom bubble and the Lehman bankruptcy.

Dotcom bubble and the Lehman bankruptcy

The trend lines of the export development in the U.S. and Germany show that there was stronger growth in exports in the phase after the dotcom bubble than in the period 1991 to 2001. After the Lehman bankruptcy, i.e., 2011 to 2019, the average growth in exports was lower than in 1991 to 2001. In my opinion, there are three central reasons for this:

• First, although there was a decline in real GDP growth rates after the bursting of the dotcom bubble, there was no contraction worldwide and in almost all seven major industrialized nations. The Lehman bankruptcy, on the other hand, led to a slight decline in global GDP and substantial GDP declines in the G7 countries (see Figure 4). In Europe, the euro crisis began in 2010. This was a combination of the sovereign debt crisis, banking crisis, and economic crisis and primarily affected the four southern European countries Italy, Spain, Portugal, and Greece.
• Second, China joined the WTO in 2001. This meant that not only Chinese exports increased strongly. Chinese imports are also rising – and so are the exports of the countries that supply their goods to China. After the Lehman bankruptcy, growth in Chinese imports was less strong (see Fig. 5).
• Third, after the Lehman bankruptcy, many countries introduced trade barriers to boost domestic economies. This protectionist course continued after the economic recovery – most notably in the form of the trade dispute between the U.S. and China. This slowed down the global exchange of goods. As a result, the share of global goods exports in global GDP has tended to decline since 2011 (see Figure 6).

Outlook: Corona pandemic and global export dynamics

If the rough pattern described here continues to apply after the corona pandemic, a further decline in global export dynamics can be expected, since the feared economic slump is much greater than after the Lehman bankruptcy (see Fig. 4). In Europe, the imminent de facto withdrawal of the United Kingdom from the E.U. – the Brexit – will place an additional burden on trade and economic growth.

The danger that individual states will resort to protectionist measures to support the domestic economy is high worldwide. However, this would be the wrong approach. It means abandoning specialization gains and growth impulses because international trade is an important source of growth and prosperity for an economy. Those who want to make up for the losses in growth from the Corona pandemic as quickly as possible are betting on the wrong horse with protectionist measures and customs duties.