Early November Data Paint Alarming Picture For Global Trade

World trade fell off a cliff last month.

There's still the U.S. and the big European economies to come, but so far the November data from early-reporting countries paint an alarming picture of the global crisis's impact on the cross-border flow of goods and services.

Plunging commodity prices, a squeeze on trade finance brought on by the credit crunch, wild swings in exchange rates and an accompanying nosedive in economic demand have combined to produce a startlingly abrupt decline in trade.

South Korea said its exports fell 18.3% on the year in November, while its imports plunged 14.6%. Taiwan cited a 23.3% on-year drop in exports and a 13.2% fall in imports. Brazil eked out a year-on-year gain in total trade, but its exports were down a whopping 20% on the month. Meanwhile, Japan said its exports in the first three weeks of November plummeted 24.7% from the same period in 2007 while imports dropped 7.1% over that time.

Perhaps the most important news came from China, a country whose seemingly unstoppable growth over the past decade has been greatly powered by exports.

While not nearly as eye-catching as some of the other countries' results, the 2.2% year-on-year drop in China's exports was the first decline since 2001 and its biggest since 1999. And in a sign that the rest of the world can't rely on the same insatiable Chinese demand for its products to power their own economic growth, the country's imports plunged 17.9% over the same period in November.

Only in October, Chinese exports had continued to power higher, posting a 19.2% gain on the year, a contrast that shows how quickly the global credit crisis is working its way into the real economy of production.

Given the complexity of global supply chains, these various countries' numbers could be somewhat exaggerated by double-counting as many countries' imports include goods on which minimal value is added before they are re-exported. This is especially so in Asia.

Still, the same double-counting effect was evident in upside exaggeration when things were looking good. It's the trend that matters and on that score it is sending out alarm bells. Next year is not looking like a good one for exporters.

On Tuesday, the World Bank forecast in its 2009 outlook report for the global economy that total world trade volumes would contract for the first time next year since 1982.

"This decline is driven first and foremost by a sharp drop in demand, as the global financial crisis imposes a rare simultaneous recession in high-income countries and a sharp slowdown across the developing world," the World Bank said in its report.

The Bank cited strong threats to trade in capital goods as the credit crunch eats into investment and problems in trade finance and export insurance as key problem areas, as well as the distorting effect and the uncertainty brought on by some "sharp, unpredictable swings in exchange rates."

At this rate, it may take some time for a return to the kind of trade expansion rates that, according to the International Monetary Fund, took the total value of global merchandise trade from 14% of world gross domestic product in 1950 to 25% in 2006.

Of perhaps greater concern is the risk that countries will respond by adopting a more protectionist stance, further undermining trade and global economic growth to fuel a vicious-cycle of sliding incomes and isolationist recrimination.

Although last month's meeting of the Group of 20 nations in Washington produced rhetoric strongly against such responses, there are already signs that the crisis is hindering the drive toward more open world markets. World Trade Organization chief Pascal Lamy said Friday that he had to scrap plans for a ministerial meeting on a new trade pact due to an "unacceptably high risk of failure."

But some economists argue that a pause in trade-opening measures is appropriate at this moment so long as the status quo on tariffs and other barriers remains and the clock is not turned back toward the bad old days of protectionism.

Rather than fixing the world economy through trade, the crisis in demand requires the kind of classic Keynesian fiscal stimulus plans that country after country is now announcing, says Colin Bradford, a global economy specialist at the Brookings Institution.

Eventually, "by stimulating domestic demand and growth, there will be a secondary effect trickling back into a recovery in trade flows," he said. But for now, he said, the stimulus spending can only hope to "stop trade from cascading downwards."

According to Bradford, it would not be an entirely bad thing if global trade were to take a back seat to domestic economic growth in the years ahead, since the latter is needed to boost jobs and local confidence.

"You don't want trade-driven growth at a time like this. Hell no, you want domestically driven growth," he said.

-By Michael Casey, Dow Jones Newswires; michael.j.casey@dowjones.com; 54-11-4590 2428