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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 / December 17, 2008

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.

Aly Song/Reuters

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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.

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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.

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.