Demand Spillovers and the Collapse of Trade in the Global Recession

This paper uses a global input-output framework to quantify U. S. and European Union (EU) demand spillovers and the elasticity of world trade to GDP during the global recession of 2008-09. Cross-border intermediate goods linkages have implications for the transmission of shocks and the relationship between demand, trade, and production across countries. This paper finds that 20-30 percent of the decline in U.S. and EU final demand was borne by foreign countries, with the North American Free Trade Agreement (NAFTA) and emerging Europe hit hardest. Allowing final demand to change in all countries simultaneously, the framework presented here delivers an elasticity of world trade to GDP of 2.8. Thus, demand forces alone can account for roughly 70 percent of the trade collapse. Large changes in demand for durables play an important role in driving these results. [JEL F4, F1] IMF Economic Review (2010) 58, 295-326. doi:10.1057/imfer.2010.15; published online 9 November 2010