When sales drop sharply – and the great trade collapse was a gigantic drop in international sales – economists look for demand shocks and/or supply shocks. The emerging consensus is that the great trade collapse was mostly a demand shock – although supply side factors played some role.
As we shall see, the presences of these highly integrated and tightly synchronised production networks plays an important role in the nature of the great trade collapse (see chapters by Rudolfs Bems, Robert Johnson, and Kei-Mu Yi, and by Andrei Levchenko, Logan Lewis, and Linda Tesar).
The synchronicity effect helps explain why the great trade collapse was so great in an even more direct manner; almost every nation’s imports and exports fell at the same time. There was none of the averaging out that occurred in the three other postwar trade drops. But why was it so synchronised?
This time the drop was far, far larger. From a historical perspective (Figure 8), the drop is astonishing. The figure shows the trade-to-GDP ratio rising steeply in the late 1990s, before stagnating in the new century right up to the great trade collapse in 2008.
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