Let’s Assume the WTO is Wrong: 6 plus 1 Hypotheses for the World Trade Collapse

Abstract

This paper challenges the main stream narrative that links the strength and speed of the world trade collapse in 2008-9 to (i) lacking trade finance, (ii) international value chains and (iii) ‘murky’ protectionism. The paper discusses the emerging literature and points out counteracting forces such as the trade credit and trust that build in commercial relationships. These positive factors are often overlooked by those who blame value chains for the severity of the world trade collapse. The paper offers the theory of trade uncertainty as an alternative explanation focusing on existence of information and/or co-ordination externalities in decentralized market economies that are hit by an unexpected trade shock. A cross section of the depth, duration and steepness of the import decline in 45 countries over the period 2008Q1-2009Q4 finds shorter, but stronger and thus steeper declines for autocratically economies (as suggested by the trade uncertainty hypothesis) and refutes the value chain hypothesis showing that both the share of manufacturing trade and an indicator for the vertical specialization in trade are not (and sometimes negatively) associated with the strength of import contractions. Countries with large shares of manufactures in trade (a proxy for international value chain activity) and/or vertical specialization in trade did not reduce their trade more strongly. This finding suggests that international value chains may very well have had a major dampening effect that reduced the extent to which trade fell.

Keywords: world trade collapse, value chain, trade uncertainty

JEL Classification: F01, F10, G01