Recovery and beyond : lessons for trade adjustment and competitiveness

The great trade collapse in the wake of the 2008-9 financial crisis provided a unique insight into the complexities inherent to international markets, and underlined a number of lessons for us to consider as we evaluate the shape of the global trade recovery. While the factors contributing to the crisis were diverse and multifaceted, it is arguable that persisting imbalances across the globe played a role. How will trade imbalances unwind and what is the role for policies influencing international transactions for goods and services? A precursor to answering this question is a broad understanding of how trade flows react to changes in the macroeconomy, and therefore much of this book will focus on recent assessments of the drivers of trade adjustment. A closely related concept affecting the degree to which countries trade is their relative competitive position. To tie in the chapters with the broader policy emphasis on competitiveness, we will also define and evaluate several drivers of international trade competitiveness. Conceptually, our point of departure is the long-standing debate on the magnitude of trade elasticities, i.e. the extent to which relative prices and national income affect international trade. In the short run, trade seems surprisingly sensitive to growth and relative price changes, as evidenced by the fallout of the recent financial crisis and the concurrent massive swings in nominal goods flows. Over longer periods these elasticities - and the corresponding Armington elasticity indexing the degree of differentiation across source countries - define both the size of nations in international markets and the magnitude of welfare gains from liberalisation. An important contribution of this book is thus its provision of some direct and indirect quantitative evidence on the size and drivers of trade elasticities.