Changes in the volume of world trade and the prices of important commodities are always the focus of decision-makers, as the change in these two factors can have significant positive or negative impacts on the country’s welfare. The net gains and losses caused by changes in the international commodity prices and the amount of commodities traded are called trade shocks. That is, trade shocks involve changes in both trade volume and trade prices.
One of the most frequently discussed issues is the economic impacts of the changes in oil prices on the countries exporting and importing oil. The drop in oil prices is positive for importing countries, and negative for exporting countries. Not only the changes in oil prices, but also changes in price and quantity of other goods are affecting the economy.
The World Economic Vulnerability Monitor system, developed by the UN, examines trade shocks caused by changes in the price and quantity of 250 product groups using 164 countries data. The system considers the following four factors when evaluating commercial shocks: 1) the effect of changes in the international prices of export goods, 2) the effect of the change in international prices 3) the effect of the change in the amount of export of the countries 4) the effect of the change in the import demand of the countries. The changes in the first two elements will be expressed as terms of trade shocks. For example, if the export prices of an country increase and the import prices decrease, then the country becomes experienced with positive trade shocks. On the contrary, if export prices fall and import prices rise, the country is faced with negative trade shock. The change in the demand for export of the country is referred as an external shock, and the change in the demand for import is defined as demand shock because of depending on the incomes and behavior of national economic agents. As a result, the total impact of these shocks determines the gains or losses from trade.
The table below shows the trade shocks created by changes in the price and quantity of merchandise since 2004. Between 2004 and 2007, all economies have been experienced with positive trade shocks. The change in the terms of trade between these years led to an increase in trade flows of 1.9% of total GDP in the world economy. However, trade flows have developed, and transition and developing economies have occurred at different rates. Positive commercial shocks in developed economies are 0.9% of GDP. Trade flows of developed economies have declined significantly in this period. This was 7.9% in transition economies and 4.8% in emerging economies. In 2009, trade flows were negatively affected as a result of the impact of the drop in total commercial activity and prices. The economies that encountered the most negative trade shocks were transition economies. In 2010 and 2011, the worldwide recovery of losses in 2009 is possible. So it was a kind of balancing. From 2012 onwards, we are witnessing a positive trade shoks in a very low level. Commercial activities have provided trade activity around 0.5% of global GDP. This rate is 0.1% in developed countries. In transition economies and emerging economies, this rate is 1.3% and 1.1% respectively. The year 2013 may be expressed as a fully marginal year in terms of trade shocks. This marginal development indicates that trade activity has come to a halt. In 2014 and 2015, it is pointing to an increase in commercial activity in other economies, excluding transition economies.
Table 1. Trade Shocks (GDP,%)
World | Advanced Economies | Transition Economies | Emerging Economies | |
2004-2007 | 1.9 | 0.9 | 7.9 | 4,8 |
2009 | -2.7 | -2.2 | -8,8 | -3 |
2010-2011 | 2.5 | 1.5 | 7,3 | 4,3 |
2012 | 0.5 | 0,1 | 1,3 | 1,1 |
2013 | 0.5 | 0.2 | 0.4 | 0,8 |
2014-2015 | 1.2 | 1 | 0,7 | 1,6 |
Source: UN/DESA, World Economic Vulnerability Monitor.
The commercial shocks created by the changes in the terms of trade differ according to the basic economic groups. Countries’ level of development increases their sensitivity to shocks. Similarly, countries’ international reserves and the ease of obtaining foreign financing can reduce negative trade shocks. In addition, the openness of the economy can be influential in trade shocks. Countries with commercial product diversity in this sense will be more resistant to deterioration in the terms of trade. Adherence to a particular product in foreign trade – like oil – will increase the impact of shocks. Developed, transition and developing economies have experienced relatively positive shocks in recent years, but proportionately few. The changes that happen in commerce which is the engine of the growth are all influencing the economies. Increasing interdependence in a global world is the most important reason for this. Both trade and financial dependence have increased. In addition, the need for the power of some countries in other countries – such as the need of Eurozone countries’ to Germany’s economic strength – is increasing. The oil price decrease shows a game in which one side wins and the other loses whose downfall is zero-sum. As a consequence of the mutual interaction, the sum of the gains of the world economy is reduced. The point reached is that trade activities are declining all over the world. The need for a stable business environment is increasing in order to prevent employment and income losses.