Explaining the Slowdown in Global Trade

Following the global financial crisis, global trade contracted sharply and, after an initial recovery, grew at an unusually slow pace relative to global GDP. This article reviews cyclical and structural explanations for this phenomenon, and finds econometric evidence that cyclical factors – namely shifts in the composition of aggregate demand toward less import-intensive components and heightened economic uncertainty – can explain most of the slowdown in trade in a panel of advanced economies. Although the slowdown in aggregate global trade is well explained by the model used, the results vary by country. For Australia, the model performed well until 2012, after which it over-predicted import growth, most likely because it did not adequately capture the import intensity of mining investment and resource exports.