A global trade decline?

In a rare alignment, most of the world's big economies are expected to shrink.

By , Staff writer of The Christian Science Monitor

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    Slowdown: Shipping containers sit at a port in Shanghai, China, where imports and exports have posted striking declines. Global trade may contract next year for the first time since 1982.
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    Search: A sniffer dog led members of a bomb disposal unit through Printemps department store Dec. 16. Explosives were found in the store's bathroom.
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Global trade may shrink next year for the first time since 1982, a sign of new challenges as a downturn that began in the United States spreads abroad.

Earlier this year, US businesses could look overseas for some support at a time of weakness at home. Exports were helping to offset domestic declines.

Now, for the first time since the 1970s, the big economies of the US, Japan, and Europe are contracting simultaneously. Instead of softening or mitigating financial risks, the world's economic connectedness is now amplifying them, economists say.

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As recently as this summer, global inflation was a major concern, but in November, American consumer prices fell sharply as prices for commodities such as oil deflated.

This doesn't mean the global economy is collapsing. But much depends on how effectively Japan and European nations work with the US on moves to revive growth – a path punctuated Tuesday when the Federal Reserve cut its interest rate to historic lows.

"Most governments around the world have recognized the severity of the situation," says Jay Bryson, a global economist at Wachovia Corp. in Charlotte, N.C. But "in order to get you out of the global recession, you really need to have Western Europe and the United States start to grow again."

Whenever the US enters a recession, the effects are felt on all continents.

It's not just that America is the world's largest economy. It's also that dozens of other economies pin their hopes to a high degree on US consumers.

China, of course, has become a twin engine of global growth alongside the US. But it relies heavily on trade with the US.

A bellwether of global commerce, China last week reported that it shipped fewer goods last month than it did in November 2007. That was the first such year-over-year drop in seven years. China's demand for imports also plunged.

Although the US has a large impact on other nations, the scope of current problems is unusual. The last time that the US, Japan, and Europe all saw recession was in 1973-74, according to the Organization for Economic Cooperation and Development, which represents industrialized economies. Japan's decline at the time came slightly ahead of downturns in the US and Europe.

Now, the global weakness stems from many factors, not just the slowdown in US consumer spending. America's housing slump has parallels in other nations, from China to Spain. Financial turmoil in the US has rippled through the global banking system. Falling prices for oil and other commodities, while helping consumers in many nations, have hurt resource-dependent economies such as Russia.

One source of hope is that many emerging economies have set up strategic defenses in the decade since a currency crisis swept through Asia. A host of nations have more foreign currency reserves and less foreign debt than they did in the late 1990s.

Eastern Europe is an exception, with nations such as Hungary hit hard as foreign lenders become more cautious.

But the emerging nations aren't yet big and dynamic enough to pull the developed world out of recession.

In places such as China, a slowing pace of growth means fewer jobs for legions of rural residents looking for work in cities.

"We may have the first decline in trade since 1982 next year," World Bank President Robert Zoellick warned last month. The world's poor, he added, "As always, are the ones at most risk."

Around the world, nations are focused on the challenge. Governments are responding by cutting interest rates, throwing lifelines to banks, and rolling out stimulus spending plans.

"We're all in it together," says Michael Cosgrove, an economist at the University of Dallas. "US policy is not adequate," he says, but the US is further along in the process than the Europeans or Japanese. "It would be a plus" if the Europeans would do more, he adds.

The US Federal Reserve moved Tuesday to lower the federal funds rate, the short-term lending rate for banks, to a target range of 0 to 1/4 percent. Citing a weak job market, the Fed said conditions "warrant exceptionally low levels of the federal funds rate for some time," as well as other measures designed to restore normal growth.

Some nations cannot easily afford more rate cuts or spending. But economists would like to see Germany, for one, accelerate the scale of its stimulus plans.

One silver lining is that the global downturn may afford an opportunity for correcting imbalances that have built up over two decades.

The size of the US trade deficit – and America's corresponding inflow of money borrowed from abroad – has reached proportions that many economists view as unsustainable.

In part, this reflects "export led" growth strategies by other nations. Now, as US consumers pare debt and buy fewer goods from abroad, the trade deficit may decline to more a sustainable level. It's not a sure thing.

"Everyone wants to export their way out of this" recession, says economist Simon Johnson at the MIT Sloan School in Cambridge, Mass.

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