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No. 98,   20 December 2013
SOUTHVIEWS is a service of the South Centre to provide opinions and analysis of topical issues from a South perspective.
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Impact of Global Crisis on Trade and Trade Imbalances

Some Caribbean countries are facing a balance of payments problem because of a downturn in tourism and other factors.  
By Yılmaz Akyüz, Chief Economist, South Centre
International trade has been the single most important channel of transmission of contractionary impulses from the financial crisis and recession in the US and the EU.  After growing at an average rate of some 7 per cent per annum, the volume of imports by Advanced Economies (AEs) first decelerated sharply in 2008 and then fell by 12 per cent in 2009, largely because of the decline in imports by the US.  It bounced back in 2010 due to a broad-based recovery, but lost momentum as Europe went into tailspin.  Growth of total volume of imports by AEs barely reached 1 per cent in 2012.  In order to avoid a sharp deceleration of growth, Developing Countries (DCs) have had to rely on their own markets or South-South trade.  In fact, given the widespread economic downturn in AEs, the latter have also sought expansion in developing country markets in order to kick-start recovery.  

While all DCs have been hit directly or indirectly by the contraction and slowdown in imports by AEs, the incidence varied from country to country according to their dependence on exports, the relative importance of markets in AEs and the import content of their exports.  In countries with very high ratio of exports to GDP, particularly in exporters of manufactures, import content of exports also tends to be high.  Thus, any decline in exports entails cuts, pari passu, in imports used directly and indirectly for exports.  Declines in exports also reduce imports through their impact on income and domestic demand, including imports from all countries.  Indeed, as a result of these cumulative effects, in volume terms the world trade declined at much the same rate as the rate of decline of volume of imports by AEs.  The decline in dollar terms was almost twice as large because of a sharp decline in prices, particularly for commodities.
On some estimates, trade shocks incurred by developing countries in 2009 as a result of the crisis amounted to 4.4 per cent of their GDP, of which 3.3 per cent was due to demand shocks resulting from declines in export volumes and the rest was the terms of trade shock resulting from price changes (UN WESP, 2010).  Among the regions the total shock was greatest, over 12 per cent of GDP, in West Asia because of a sharp drop in oil prices, followed by Africa (5.5 per cent), East and South Asia (3.3 per cent) and Latin America and the Caribbean (2.3 per cent).
Among major DCs, the trade impact of the crisis has been particularly severe for China because of its dependence on exports to AEs.  In the period 2002-07, Chinese exports grew by more than 25 per cent per annum, accounting for about one-third of GDP growth, taking into account their import contents.  The dependence on exports to AEs was even higher for smaller exporters of manufactures in Asia, both directly and through supplying parts and components to China.  With the outbreak of crisis in AEs, exports of Asian DCs first slowed sharply in 2008 and then dropped in 2009, and became a major drag on activity, reducing growth by 5-6 percentage points (Akyüz, 2012).  
Import cuts in Europe have hit Africa and Central and Eastern Europe particularly hard because of strong trade linkages; more than 50 per cent of exports of several non-EU European countries and some North African countries are destined to the EU and the figure is over 35 per cent for several countries in sub-Saharan Africa as well as Russia (IMF, 2011).  The direct effects of cuts in exports to the EZ during 2011-12 are estimated to have reduced growth by some 0.8 per cent in South Africa and Russia, 0.5 per cent in China and India, and 0.3 per cent in Brazil and Indonesia (OECD 2012: Box 1.1.).  Many DCs in sub-Saharan Africa relying heavily on exports to Europe were also hit hard.  These include Côte d’Ivoire, Mozambique and Nigeria where exports to the EU account for between 10 and 17 per cent of GDP (Massa et al., 2012).  
The crisis has resulted in significant changes in the pattern of world trade.  Before the crisis South-South trade was largely conditioned by trade between DCs and AEs. China’s imports of manufactures from Asian DCs and commodities from all developing regions accounted for a large proportion of South-South trade and were mainly used, directly or indirectly, for its exports of manufactures to AEs (Akyüz, 2011a, 2012).  With the shift of China to investment-led growth, not only has there been a shift in Chinese imports from manufactures to commodities, but also a larger proportion of imports have come to be used for domestic demand – over 55 per cent in 2011 compared to less than 50 per cent in 2007. 
 This has also meant that for many commodity exporters, China has become the single most important market.  For instance, in 2007 Brazilian exports to the EU and US were four times and twice the level of its exports to China, respectively.  Now the Brazilian exports to China and Europe are about the same and Brazilian exports to the US are one-half of its exports to China. 
Furthermore, both because of the rise in commodity prices and the expansion of volume of exports, commodities have also come to account for an increasing proportion of exports of several semi-industrialized exporters of manufactures in the South.  This includes not only Brazil but also some South East Asian DCs such as Malaysia.  The increase in the share of primary commodities in total exports of these countries which had already started before the onset of the crisis has accelerated after 2009.  In Brazil export earnings from commodities now exceed those from manufactures by a large margin. In Malaysia, widely considered as one of the successful second-tier Newly Industrializing Economies (NIEs), manufactures do not dominate export earnings if measured in value-added terms since they have much higher import contents than commodities.  If account is taken of import contents, the share of manufactures in (value-added) exports would be about the same as, if not lower than, the share of primary commodities.
Trade imbalances
The crisis has resulted in a significant shift in global trade imbalances.  With the increased reliance of DCs on domestic demand for growth, current account surpluses in export-led East Asia have declined while many other DCs have moved from surpluses to deficits or started to run larger deficits.  On the eve of the crisis, DCs taken together had a current account surplus of almost $700 billion and a little more than one-half of this was due to China.  It fell by almost $300 billion by the end of 2012 despite a $130 billion increase in the current account surplus of the Middle East and North Africa as a result of increases in oil revenues.  The surplus of developing Asia fell from $400 billion to $130 billion, China from $350 billion to $210 billion while Latin America and sub-Saharan Africa both moved from surpluses to deficits.
DCs have absorbed a large part of adjustment in global imbalances that had pervaded before the outbreak of the financial crisis.  The current account deficits of AEs taken together fell from a peak of $480 billion in 2008 to less than $60 billion in 2012.  The US current account deficit fell by $200 billion while the EZ moved from a deficit of $100 billion to a surplus of $220 billion.  Of the three major surplus countries, the current account surplus of Germany has increased after the onset of the crisis, reaching 7 per cent of GDP at the end of 2012.  Germany now runs trade surplus against China.  By contrast, both Japanese and Chinese surpluses have fallen sharply. The decline in China’s surplus has been particularly dramatic, from a peak of 10 per cent of GDP in 2007 to 2.6 per cent in 2012.
As noted, in the run-up to the crisis the share of wages and private consumption in GDP was on a downward trend in all three major surplus economies, Germany, Japan and China.  In all three countries GDP growth rates exceeded the growth rates of domestic demand.  Growth was much slower in Germany and Japan but more dependent on exports than in China where imports expanded by double-digit rates thanks to a very strong growth of domestic demand (Akyüz, 2011b).
After the outbreak of the crisis, Germany has continued to rely on exports.  Its GDP growth exceeded growth of domestic demand in every year throughout 2010-12, thereby sucking in foreign demand and effectively exporting unemployment.  It has thus continued to be a major source of imbalance not only in the EZ, but also globally.  By contrast, China has provided a major demand stimulus to the rest of the world by expanding domestic demand and allowing its real effective exchange rate to appreciate by some 20 per cent since the onset of the crisis.

The full South Centre's Research Paper No. 48 on Waving or Drowning: Developing Countries After the Financial Crisis is available at

Author: Yılmaz Akyüz is the Chief Economist of the South Centre. Contact:

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