The months since last September have seen precipitous drops in global production and trade, first in the developed economies, then in developing ones as well. Indexes calculated by the Organization for Economic Cooperation and Development (OECD) of composite leading indicators for the major industrial economies have plunged to January 2009, indicating a high probability of a continuing decline in economic activity. Governments have tried a variety of policy measures to address the economic crisis, including bailouts for banks that are important for the economic and financial system, and, more recently, mortgage assistance for struggling homeowners in the United States. All of this is in addition to monetary and fiscal policies that have been deployed since the start of the crisis. Conventional monetary policy may be reaching the limits of its effectiveness, with interest rates in the United States and elsewhere-approaching zero. The timing of the recovery may now depend on how effective are proposed fiscal stimulus plans, which currently amount to more than 3% of world production.

Since the recession began to take hold in the fourth quarter of 2008 there has been little cause for optimism in the outlook for trade in 2009. The financial crisis has disrupted the normal functioning of the banking system and deprived firms and individuals of much-needed credit. Falling stock markets and housing prices have also administered negative shocks to wealth in the United States and elsewhere, making households unwilling to purchase durable goods such as automobiles while they attempt to rebuild their savings. Falling commodity prices, while a boon to consumers in importing countries, have also deprived oil-producing countries of export revenues.

Not even China can insulate itself from global downturn when most of it major trading partners are in recession. China's exports to its top six trading partners-considering the EU as a single partner- represented 70% of the country's total export in 2007. All of these trading partners are currently experiencing the contraction and are likely to exhibit weak import demand for some time.

Available monthly data for most major traders show large drops in merchandise exports and imports through the first two months of 2009. An exception to this pattern of decline in trade flows is discernible for certain economies in Asia, where positive monthly import growth numbers were recorded for China (17 per cent) and also for Singapore, Chinese Taipei and Vietnam. While this is only a single month of data, and should therefore be interpreted cautiously, it could be evidence of slowing decline and perhaps a "bottoming out" of negative trade growth trends. Future trade growth will, of course, depend on what happens to demand elsewhere in the world economy.

Reasons for trade contraction

Trade growth data show declines that are larger than in past slow-downs. A number of factors may explain this. One is that the fall-off in demand is more widespread than in the past, as all regions of the world economy are slowing at once.

A second reason for the magnitude of recent declines relates to the increasing presence of global supply chains in total trade. Trade contraction or expansion is no longer simply a question of changes in trade flows between a producing country and a consuming country-goods cross many frontiers during the production process and components in the final product are counted every time they cross a frontier. The only way of avoiding this effect-whose aggregate magnitude can only be guessed at on account of the absence of systematic information-would be to measure trade transactions on the basis of the value added at each stage of the production process. Since value-added, or the return to factors of production, is the real measure of income in the economy, and trade is a gross flow rather than a measure of income, it follows from the reasoning above that strong increases or decreases in trade flow numbers should not be interpreted as an accurate guide to what is actually happening to incomes and employment.

A third element in current conditions that is likely to contribute to the contraction of trade is a shortage of trade finance. This has clearly been a problem and it is receiving particular attention from international institutions and governments. The WTO has been playing a role as honest broker by bringing together the key players to work on ensuring the availability and affordability of trade finance.

A fourth factor that could contribute to trade contraction is protection. Any rises in protection will threaten the prospects for recovery and prolong the downturn. The risk of aggravated protectionism is rightly a source of concern going forward.