Arm's-Length Trade: A Source of Post-Crisis Trade Weakness

22 Pages Posted: 24 Jul 2017

Date Written: July 11, 2017

Abstract

Trade growth has slowed sharply since the global financial crisis. U.S. trade data highlights that arm's-length trade--trade between unaffiliated firms--accounts disproportionately for the overall post-crisis trade slowdown. This is partly because arm's-length trade depends more heavily than intra-firm trade on emerging market and developing economies (EMDEs), where output growth has slowed sharply from elevated pre-crisis rates, and on sectors with rapid pre-crisis growth that boosted arm's-length trade pre-crisis but that have languished post-crisis. Compounding such compositional effects, arm's-length trade is also more sensitive to changes in demand and real exchange rates. For example, the income elasticity of arm's-length exports is about one-fifth higher than that of intra-firm exports. Hence, post-crisis global growth weakness has weighed more on arm's-length trade than on intra-firm trade. Unaffiliated firms may also have been hindered more than multinational firms by constrained access to finance during the crisis, heightened policy uncertainty, and their typical firm-level characteristics.

Keywords: International Trade and Trade Rules

Suggested Citation

Lakatos, Csilla and Ohnsorge, Franziska, Arm's-Length Trade: A Source of Post-Crisis Trade Weakness (July 11, 2017). World Bank Policy Research Working Paper No. 8144. Available at SSRN: https://ssrn.com/abstract=3006218

Csilla Lakatos (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Franziska Ohnsorge

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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