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Trade Drop Threatens To Deepen Global Recession

This economic downturn has put globalization into reverse. Countries are not trading with each other like they used to, and economists say that if governments aren't careful, trade could slow even more and make the global recession worse.

Shipping lanes are quiet; ports are empty; trading companies are in deep trouble.

Japan this week reported that it exported 50 percent less in February than it did a year ago. Germany's exports were down about 25 percent.

On Thursday, the Commerce Department said the U.S. trade deficit — the amount by which imports exceed exports — was $10 billion less in February than in January. A smaller trade deficit would normally be a good thing, but in this case, it shows how the U.S. economy has weakened: Americans are cutting back on their purchases of foreign products.

A 'Terrifying' Plunge

The Organization for Economic Cooperation and Development says global trade is in "free fall." The World Trade Organization predicts that trade will be down 9 percent this year.

"I see something of a disaster," says Uri Dadush, former head of international trade at the World Bank. He says the latest trade numbers are "terrifying."

"In the first quarter of this year and in the fourth quarter of last year, it looks like world trade may be falling at an annual rate of 20 percent, and that is unprecedented," he says. "Even during the Great Depression, trade did not fall so rapidly."

Multiple Factors Depress Trade

The drop in trade is due to a variety of factors. The global economic downturn means consumers and businesses can no longer afford as much of what people in other countries are producing. Plus, there are the banking problems.

Desmond Lachman, an international economist with the American Enterprise Institute, says the credit crisis made a deteriorating trade situation all the worse.

"If companies can't get letters of credit from their banks, it makes [it] very difficult to finance the exports that they've got," he says.

And then there's globalization: Countries trade more of what they produce, and they depend on those transactions. When Americans stop buying Japanese or German cars, the Japanese and German economies suffer.

Developing countries that export cheap manufactured goods are hurt by the downturn; soon, they cut back on imports of industrial equipment from the United States. The whole world economy shrinks simultaneously.

A Global Crisis

"This just makes a very much nastier recession than when the recession is not synchronized, where you've got one country weak but the other country strong," Lachman says. "This is not a recession that only affects the United States or only affects Europe. This is a global crisis that would seem to need a global solution."

A big part of the solution would be to revive global trade. Governments at the recent Group of 20 summit made an effort to do that by approving a $250 billion credit line for trade. They also promised to resist protectionist policies that would hurt trade even more.

The Dangers Of Protectionism

Governments, including the United States, have sought to protect their own economies — helping their national auto companies, for example. But Arvind Subramanian of the Peterson Institute for International Economics points out that the downturn has not yet produced the kind of protectionist policies associated with the Great Depression.

"The fact that we haven't gone down the route of the 1930s is partly because I think governments know that if you go down that route, it's really calamitous," he says. "And that is why, in some ways, the trade barriers that countries are erecting now, they are barriers that don't actually violate any rules. Because they know once they start doing that, you know, it's open season, and then you can very easily go down into a kind of 1930s protectionist mode."

But with global trade still in free fall, the world economy is still in great danger. Continued high unemployment puts government leaders under great political pressure, and the temptation to protect their own workers will remain fierce.

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