Trade, cars and the great recession
One of my favorite trade economists, Joe Francois, has been working with Julia Woerz on the reasons we have seen such a dramatic (minus 20%) fall in nominal trade values in the past two quarters when the fall in output over the same period was serious but much smaller (minus 5%).
"The problem is not trade finance, but rather finance, full stop. This recession has been characterised by a massive collapse of credit mechanisms that has hit the capital goods and vehicle sectors particularly hard. It turns out that motor vehicles are also the driver of much of the recent trend in OECD trade data. " Extract from Vox EU
The trade data holds an old (but how often forgotten!) lesson for Minister for Innovation, Kim Carr.
Remember the glee with which he committed $6 billion of our money to rescue the moaning motor-vehicle multi-nationals from their marketing errors, just ahead of the 'GFC'? Since the Rudd-Carr plan for motor vehicle subsidies was announced, the sector's exports have tumbled further than all others.
"Once we control for [price deflation], 56% of the real drop in exports is in motor vehicles and capital goods. Raw materials represent another 24% of the drop." Francois and Woerz
But the trade-plunge was not the cause of the car makers' recent woes. The dramatic fall in shipments came after people stopped buying their over-priced, oversupplied vehicles.
"The drop in motor vehicle trade actually lags the corresponding drop in US production. According to the BEA, domestic production of cars was down 60% from February 2008 to February 2009. Over the same period, real exports fell “only” 45%, which is slightly better than the 47% drop from January 2008 to January 2009." Francois and Woerz
The lesson for Carr? Governments have no business picking industrial strategies on the basis of dogmatic 'grand visions' and advice from mates. All too often it's the marketing strategy that has failed and no amount of public money will remedy that.
Posted on 05/06 at 10:30 AM.
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