Global Imbalances and the Trade Slowdown

From the mid-1990s until the financial crisis, global trade grew twice as fast as global income, far faster than in previous or subsequent periods. During this period of rapid trade growth, global current account imbalances also expanded rapidly. If excess savings in some countries financed more consumption and investment in other countries, then trade and trade imbalances would move together. Greater capital mobility thus may help to explain why trade surged in the period before 2007 and why it slowed more sharply in later years when demand stalled. Consistent with this explanation, the countries that contributed most to global trade growth during the period of rapid trade growth also experienced large imbalances. Constraining trade deficits to historical norms, this paper shows that trade growth would have been more moderate in the late 1990s and early 2000s and stronger in subsequent years. Going forward, assuming global imbalances remain relatively unconstrained, the relationship between trade growth and income growth will likely be less stable than before the 1990s.