Krugman on the end of trade

By Felix Salmon
October 7, 2009

Paul Krugman gave a pleasingly wonkish talk at the World Business Forum today: the attendees with their Speaker Workbooks will have found it difficult to fill out the Paul Krugman Summary Sheet on page 95, complete with blanks where they are meant to write in their Action Plans and associated Due Date. Instead, he gave a smart and detailed disquisition on the past, present, and future state of international trade.

First, though, Krugman gave a quick overview of the crisis, and there was essentially nothing there I took any issue with. He was rude about financial innovation, saying that most of it is about regulatory evasion and arbitrage; he also worries that due to the fast action of the Fed,” we stepped back from the edge of the abyss too soon, quickly enough that there wasn’t a thoroughgoing appreciation of the need for reform”.

Bernanke “has averted disaster” by putting the Fed into the lending business, he said:

Around the turn of the year, it looked as though it might be the apocalypse, but apocalypse now has turned into apocalypse put on hold, and the risk of a second Great Depression seems to have evaporated.

He also had a good line about economic forecasters, who have us returning to full employment in about five years just because all forecasts tend to bake in a return to “normal” in five years. Krugman’s more pessimistic than that, however: “We almost certainly have a long, long haul before we’re fully recovered,” he said. A good part of the reason for that is what has happened to international trade — it “has fallen through the floor in a way that it literally never has before, including in the Great Depression”. And building it back up is going to be very hard indeed.

Krugman noted that economies like Spain and the US, with overleveraged housing bubbles and financial problems, have actually outperformed relatively sober manufacturing exporters like Germany and Japan:

World trade acted as a transmission mechanism. The vector of disease spread even to those economies with relatively healthy financial systems and little speculative excess.

The reason, said Krugman, was the big spike in trade intensity (essentially the trade-to-production ratio) between 1990 and 2007, much of which can be put down to containerization and the rise in IT logistics, which allow products to be have touched dozens of different countries before reaching the final consumer. This is a good thing: “goods are a lot cheaper and our purchasing power is much greater because of this globalization,” he said. But it has also, now, come to an end.

World trade growth might not be as buoyant as it has been: this looks like a long siege for the world economy. When you recover from a crisis, you almost always rely on a large trade surplus. But the world as a whole can’t move into trade surplus, so this may be a really prolonged slump.

So the growth in world trade is going to stop, or at least slow down dramatically, even without any kind of spike in protectionism. And in fact Krugman was sanguine on that front: he sees no such spike happening, and says that once international trade rules are put into place, they tend to be pretty strongly observed. “It’s very hard to have the cascading protectionism that you had in the 1930s,” he said. “When I was in the government and someone said ‘that’s GATT illegal’, that was pretty much the end of the discussion.”

But the trade-related gains in global living standards that we’ve seen since the shipping container was invented might not be easily replicable going forwards. Krugman wasn’t specific on what he thought that meant for global GDP growth going forwards, but the clear indication was that we might be moving to a much more zero-sum world than we’ve been used to. It’s a powerful and sobering conclusion, and one which, wonderfully, said absolutely nothing about Greatness or Leadership or Success.

More From Felix Salmon
Post Felix
The Piketty pessimist
The most expensive lottery ticket in the world
The problems of HFT, Joe Stiglitz edition
Private equity math, Nuveen edition
Five explanations for Greece’s bond yield
6 comments so far

” “When I was in the government and someone said ‘that’s GATT illegal’, that was pretty much the end of the discussion.””
This is why Greenhouse Gases legislations are so important : they allow for “Gatt legal” protectionist measures. Once you strip Chinese producers of lax environmental standards and mispriced energy and increase the cost of transport, a lot of international trade disappears.

Posted by charles | Report as abusive

Germany doesn’t have a sober banking sector.

Posted by Fu | Report as abusive

To the extent that the “spike” in world trade was a function of an unsustainable consumption frenzy, it will be difficult to revive volumes quickly. But only to that extent, I suggest.

Do you know why ZH gets so much more comments than you? They are inquiring minds with interesting, provocative and sometimes wrong thoughts.

And yes FU is right: Germany has a sick banking sector too. Commerzbank and Hype Real Estate have huge books of housing credits. The Landesbanken are almost bancrupt, because they bought CDO junk from US companies.

Perform your own investigations and put Krugman’s theses into question ;). By primitively bashing ZH you will make them more important and stronger. By ignoring them, they will grow anyway *harhar*.

“But the trade-related gains in global living standards that we’ve seen since the shipping container was invented might not be easily replicable going forwards.”

You mean that a technological revolution changes things and then, when it has changed things, stops changing things?

Fancy that!

Quite a bit of that spike in trade can be put to IT advances and containerization.

But there is quite a bit more currency manipulation at the heart of it that is the 800 pound gorilla in the room of which few wish to speak.

Recall the 40% devaluation of the yuan in the mid 1990′s as China embarked on an aggressive policy of mercantilism.

They achieved most favored nation status the old fashioned way, most likely association with the Clinton – China political donations scandal which involved Mr. Gore. Not to be outdone, Mr. W Bush put the icing on the cake in his own term.

Keeping in mind that during all this, China has accumulated an enormous amount of dollars by maintaining an artificially low peg on the dollar, which as we all know is contrary to free trade 101.

And so the free markets were more than happy to export jobs and capital to China, and import cheap goods and fat profits for Wall Street, and create a trade bubble that was a tremendous boost for the credit bubble.

Paul Krugman knows this.

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see