The US has been central to the international transmission of global shocks in the current recession and recovery.
- It is a large country in global trade, acting as a major supplier and market for many countries.
- The trigger of this recession – the financial fallout of Lehman Brothers’ collapse in September 2008 – occurred in the US.
In retrospect, the global transmission of demand shocks through US trade has been substantial. The real linkages through exports and imports feature prominent roles for sectors such as construction (tied to the subprime crisis), motor vehicles and petroleum, which have been important in the current business cycle.
US merchandise trade
In tracing down the US’s impact on global transmission of the trade shock, the key facts are:
- Imports from China dominated the US real import decline; falling Chinese exports impacted exports Asia-wide along global supply chains.
- Canada and Mexico figured disproportionately in US export declines.
- The subprime crisis impacted US housing markets, in turn affecting US imports of construction materials. Prices of sawn wood declined well before US home prices. Canada lost nearly half of its global exports of sawn wood as a result.
- The motor vehicle sector has been unusually prominent in the current business cycle, with an unusually sharp downturn and recovery of trade on both the import and export sides.
The high degree of North American integration in this sector caused falling demand for autos to reverberate in regional auto parts trade.
- US imports of capital goods and intermediate inputs have continued to be weak, consistent with the pattern in US GDP data which show a consumption-led recovery with investment lagging.
When did US trade start to recover? Prices and seasonality
Tables 1 and 2 show the changes in real, deflated US trade on both a non-adjusted and seasonally adjusted basis.
Trade data show a high degree of seasonality, with above-average growth in the spring months. Moreover, the current recession has featured a sharp collapse in oil and commodity prices, which have since partially recovered. Both of those features have made the boom and bust in trade appear unusually large and short.
- The recovery in US real trade, often reported to have started in the beginning of 2009, looks quite different when price changes and seasonality are taken into account;
- US exports start to recover in April 2009, while US imports turned up only in June 2009.
These facts are is consistent with income growth:
- US GDP did not begin to grow until the 3rd quarter of 2009;
- The GDP of some US trading partners began to recover earlier, in the second quarter of 2009.
Table 1 Changes in real US trade, not seasonally adjusted.
Table 2 Changes in real seasonally adjusted US trade.
US import and export peaks
The sectoral timing of US real import peaks is markedly different from that of US real export peaks. US export peaks tend to cluster around the general peak, reflecting the synchronisation of the global peak in GDP in mid-2008. US import peaks, by contrast, show a great deal of sectoral dispersion, with some sectors turning down much earlier than others.
This diversity suggests that the decline in US import demand, as well as its depth, was significantly influenced by specific sectoral weaknesses, in particular the timing of global events related to housing and oil.
The facts are summarised in Figure 1 and Figure 2. The figures show the size of each sectors trade in 2008 with the size of the bubble; the placement of the bubble shows the timing of the peak (horizontal axis) and the size of the decline (vertical axis). Figure 1 does this for US imports; Figure 2 for US exports.
One clear point that emerges is that the demand for imported motor vehicles and parts peaked in December 2006, well before the peak in aggregate imports. This suggests some response to rising gasoline prices. Inputs into autos and/or construction, including aluminium, iron and steel, and plastics, also began to show real import declines in 2005 and early 2006. By contrast, US imports of computers and industrial machinery and crude and refined fossil fuels did not decline until relatively late in the cycle.
Figure 1 Sectoral timing of decline, real seasonally adjusted US trade.
Figure 2 Sectoral timing of decline, real seasonally adjusted US trade.
Country-specific linkages: Exports to North America, imports from Asia
The particular linkages through which global declines in demand are transmitted across countries are driven by pre-existing geographic and sectoral trading patterns, as well as by the particular structural weaknesses in each country and its trading partners.
One expects countries to “catch” recessions from the countries to which they disproportionately export and to transmit recessions to the countries from which they disproportionately import. The pre-existing patterns of specialisation with these trading partners will in part determine the sectoral distribution of the transmission of the business cycle though trade. These patterns are further influenced by contractions in the specific sectors which played a key role in triggering the recession.
Geographically, US exports go disproportionately to the EU and Canada, while US imports come disproportionately from China, Japan, and the rest of Asia. More precisely, from 2006-2008, the EU and Canada accounted for 43% of US exports and 34% of US imports on a nominal basis, while Asia accounted for 36% of US imports and only 26% of US exports. China alone accounted for 16% of US imports but only 6% of US exports.
Asymmetric trade linkages
Tables 3 and 4 provide further information on the asymmetric pattern of trade linkages. They show imports and exports from July 2008 to their respective seasonally adjusted troughs. For 7 of the top 10 HS chapters in US import declines, China is a principal supplier, while Japan is a principal supplier in four cases. On the export side, US export declines are heavily concentrated in the Canadian and Mexican markets. Thus, Asia is particularly vulnerable to declines in US demand, while the US is most strongly affected by declines in demand in North America.
The fairly aggregated categories shown below mask considerable two-way trade in parts and finished products, often within a single HS chapter. US import declines have been sharpest among products that are used as intermediate goods or inputs into other products (Levchenko, Lewis, and Tesar 2009). The fragmentation of production – through the development of long supply chains that divide the production of final goods across many geographic locations – has likely intensified the response of trade to GDP in the current recession (Freund 2009).
Table 3 Largest declines of seasonally adjusted real imports from July 2008 to trough.
Table 4 Largest declines of seasonally adjusted real exports from July 2008 to trough.
In the case of imports from China, declines in US demand are particularly likely to reverberate to third countries, particularly in Asia. China’s exports are increasingly dominated by goods produced by foreign-invested firms under “processing trade” incentives that favour importing components and exporting goods after final assembly. These conditions are particularly pervasive in computers and peripherals, telecommunication equipment, and office equipment (Koopman, Wang, and Wei 2008). The US participates in the trans-Asian electronics trade as a provider of semiconductors and other technology-intensive electronic components (Ferrantino et al. 2007). Thus, the drop in US imports of computers and cell phones leads indirectly to a drop in US exports of semiconductors and components.
A big bang in motor vehicles and parts – down and up
The particularly dramatic drop in US two-way trade in motor vehicles and parts is also influenced by production fragmentation. As seen above, US imports and exports of motor vehicles and parts have fallen at approximately twice the rate of US trade as a whole. The network of parts manufacturers and assemblers in North America is particularly interconnected, with a shock in demand causing multiple reductions in trade throughout the NAFTA region.
These reductions magnified the trade effect of shocks like rising gasoline prices (real imports began to decline early in 2007, while fuel prices were still rising) and the reorganisations of GM and Chrysler in 2008/09; the effect was felt in all subsectors of vehicles (Figure 3).
Figure 3 Collapse of vehicle imports and exports from peak to trough.
Note: S.A. indicates seasonally adjusted.
Table 5 Largest absolute changes in S.A. real imports from trough to August 2009.
Table 6 Largest absolute changes in S.A. real exports from trough to August 2009.
Tables 5 and 6 show the recovery of US exports and imports from their troughs in April 2009 (for exports) and June 2009 (for imports). The response of passenger vehicles and parts in the decline is even more marked in the recovery, accounting for 77% of the recovery in imports and 45% of the recovery in exports. Passenger vehicles imports rebound shortly before the implementation of the CARS stimulus programme (popularly known as “Cash for Clunkers”), which provided vouchers of $3,500-$4,500 for purchases of eligible vehicles associated with trade-ins of certain less fuel efficient used cars (Figure 4).
Not all sectors yet show a real trade recovery. Notably, US imports of capital goods (mostly in HS 84 and 85) lag behind the overall increase in US imports. This is consistent with third quarter data for US real GDP, which show purchases of equipment growing more slowly than consumption.
Figure 4 US trade, passenger vehicles and parts (real seasonally adjusted).
Construction and petroleum
US imports may have been an early indicator of the problems in the US housing market that later affected the financial system and the economy as a whole. Import prices of sawn wood, mostly from Canada, began to turn down in early 2005, leading a number of other indicators of the declining housing market (the Case-Shiller index of housing prices is shown below, in Figure 5). Both housing prices and prices of imported wood began to rebound together starting in June 2009, providing a positive link from the US housing recovery to at least some Canadian exports.
Figure 5 Prices of sawn wood imports and Case-Shiller housing index (seasonally adjusted)
The role of oil prices
The run-up of global oil prices in 2007 and the first half of 2008 was a contributing factor to the global recession. Much of the nominal trade collapse in the Great Recession was due to the effects of falling oil prices, as has been often noted.
The weakness in US demand for mineral fuels may also have a supply-chain component; petroleum and natural gas are major inputs into chemicals and plastics, which are in turn intermediate inputs for many other industrial sectors.
Figure 6 US imports and exports of mineral fuels.
Note: “S.A.” stands for seasonally adjusted.
Recovery of trade worldwide is strongly linked to the US recovery. A closer look at the US trade recovery indicates that it is relatively fragile.
- It has started late;
- It has so far been heavily dependent on a one-time stimulus for autos; and
- Demand for imported capital goods lags consumer goods.
These features call into question the ability of US import demand to significantly support recovery in other countries. The world might have to wait until US business confidence strengthens further.
Disclaimer: This piece solely represents the views of the authors and does not represent the views of the US International Trade Commission or any of its Commissioners.
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