# The Global Trade Slowdown: Cyclical or Structural?

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1 WP/15/6 The Global Trade Slowdown: Cyclical or Structural? Cristina Constantinescu, Aaditya Mattoo, and Michele Ruta

4 3 13. Trade Covered by Import-Restrictive Measures of All WTO Members and Observers...39 Appendixes 1 - Decomposition of the World Trade Elasticity...31

15 14 The evidence in Section III creates a presumption that, in addition to cyclical factors, there is a structural component to the current slow growth of world trade. Here we investigate the relative importance of these factors, by decomposing the growth rate of imports into its structural and cyclical components. The import growth decomposition requires a few steps. We first obtain the import growth predicted by our model ( ), by applying the estimated coefficients of equation (1) to the actual data. The predicted import growth is given by the following condition: = α + β ln y t + γ ln m t-1 + δ ln y t-1, (2) where t is the growth rate of imports at time t and are the estimates of coefficients in equation (1). Note that equation (1) can be rewritten as: ln m t = α 1 + β ln y t γ [- ln m t-1 - (α 2 / γ) - ( δ/ γ ) ln y t-1 ] + ε t,, (3) where α 1 + α 2 = α. The term in square brackets is the residual of the cointegration equation, which gives the long run relationship between imports and GDP. We can use this relationship to calculate the long-run import growth predicted by the model. Specifically, from the residual of the cointegration equation we have that: = - - ln y t (5) = - - ln y t-1, (6) where is the predicted log long-run level of imports at time t. Hence, taking the difference of equations (6) and (7), we obtain = = - (ln y t ln y t-1 ). (7) Since we already know the estimated long-run elasticity, we can use equation (7) to calculate the long-run import growth predicted by the model ( ). The last step is to obtain the part of the import growth predicted by the ECM framework and associated with the short-run factors (the impact elasticity and the speed of adjustment to the long-run equilibrium of trade). We can obtain the short-term component of import growth ( ) by subtracting equation (7) -the predicted long-run growth of imports- from equation (2) -the import growth predicted by the model:

16 15 = -. (8) Figure 6 reports the decomposition of the growth of world imports for the period The blue bars capture the long-term import growth predicted by the model ( ), while the red bars represent the predicted short-run component of import growth ( ). The figure also reports the ECM import growth ( ) and the actual growth of world imports. Figure 6 provides some useful insights. First, a comparison between actual import growth and ECM import growth shows that the model performs reasonably well in predicting trade growth over the past 43 years. Second, the long-run portion of import growth tends to explain most of the total growth for most of the sample. Third, the remaining portion, capturing cyclical effects, dominates during periods of crisis and post-crisis recovery such as the trade collapse in 2008 and 2009 and the trade rebound in The rationale for these findings is that even if the short-run trade elasticity is large and has increased over time, trade tends to quickly adjust to its long-run equilibrium which offsets the impact of income shocks. 10 Does the current global trade slowdown reflect cyclical or structural factors? Both are clearly involved. The cyclical component of world import growth (the impact growth and the adjustment term) has been negative in 2012 and As reported in Table 3, the short-term component of import growth ( ) is equal to -0.9 percent for both years. This negative cyclical factor has contributed to the sluggish performance of imports. The long-run import growth ( ), however, has also been strongly subdued. Specifically, long-term components of import growth are respectively 4.2 and 3.9 percent, much lower than the average in the pre-great Recession period (5.8 percent) and the long 1990s (7.3 percent). 10 The cyclical effects can be further decomposed into the two offsetting factors: the impact growth and the speed of adjustment. The first term is given by (ln y t ln y t-1 ), where is the estimated short-run elasticity, while the adjustment component can be calculated by subtracting this term from the short-run predicted growth of imports.

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