Economic Crisis and Its Effects on International Trade: A Case of Selected EU and Non-EU Countries

Economic Crisis and Its Effects on International Trade: A Case of Selected EU and Non-EU Countries

Miloš Parežanin, Dragana Kragulj, Sandra Jednak
Copyright: © 2021 |Pages: 19
DOI: 10.4018/978-1-7998-8314-2.ch004
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The aim of this chapter is to analyse the effects of the economic crisis on the trade among the Southeastern European (SEE) countries. The countries were divided into two groups: the EU countries and non-EU countries. Macroeconomic performances and international trade indicators of the 11 observed countries were analysed for the period 2007-2019, and the effects of the economic crisis were present in all the observed countries, particularly the effects on the export performances. The crisis also affected the entire import of the non-EU countries. The EU countries recovered from the crisis faster than the non-EU countries. However, the non-EU countries achieved a more significant inflow of foreign direct investment in the post-crisis period, which significantly improved the position of the balance of payments in these countries. The observed countries had managed to stabilise their trade flows all until the beginning of the COVID-19 crisis. The impact of the current crisis on these countries remains to be estimated in the future.
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The international trade expansion and the development of interdependence have influence on the global economic progress and complexity in the global trade relationship. This trend has been present since the 1950s, but with some contraction of economic activities, trade volumes, and capital movements due to regional or global economic crises (Broll & Jauer, 2014). According to classical and neoclassical economists, international trade plays a role in economic growth and development in both developed and developing countries. However, there is an opinion that international trade cannot have a significant impact on economic growth in the developing countries due to their lack of capacity for import and export of goods and services. Import should bring resources unavailable domestically, new products and technology that will lead to the expansion of export and access to the world markets. These countries have a slow progress towards high technology, increased efficiency, and productivity in industries. They specialise in primary goods’ production (agriculture, metal, and mineral) and struggle with industrialisation due to the lack of technological innovation. On the other hand, developed countries benefit from the international trade due to trade openness (trade liberalisation), international prices, cost of production, rising income, and comparative advantage. Today, international trade policy helps all the abovementioned countries to gain sustainable economic growth.

It is a fact that various types of crises occur more and more frequently. Economic crises happen in both national and global economies due to weak economic bases, government inability, and poor management. Prior to the global crisis (2007-2008), most crises were of regional character occurring each three years (Reinhart & Rogoff, 2008). It is also a fact that crises have influence on economies and international trade. However, international trade may also transmit crises from one affected country to other countries (contagious effect). Crises bring about the reduction of economic activity and trade, which was particularly prominent during the global financial crisis of 2007-2008 (Levchenko et al., 2010). In 2009, the world trade flows dropped by 12%, and the decrease in the world GDP was 5.4% (Chor & Manova, 2012). There are various types of crises – sovereign default, financial crises, exchange rate crashes, and inflation explosions. All of them cause major issues in the economy. One of the most common issues is the lack of capital, which affects the exchange rate, price, competitiveness, and consumption. Furthermore, crises affect economies, particularly those with development strategies based on export-led growth. When a crisis occurs, many countries apply trade measures to protect their industries and trade. Also, during the global economic crisis, different credit conditions and a slowdown in global demand affected trade volumes (Chor & Manova, 2012). These are the challenges to overcome.

The last crisis influenced both the supply and demand sides of the global economy. The supply-side effects such as restriction of movement and going to work, and/or disruption in the supply of intermediate products influenced the production. The demand side was also affected by a decline in consumption due to a fall in employment and income on one side, and an increase in uncertainty on the other side. The international service sector (tourism, air sector, etc.) suffered the most during the COVID-19 crisis (Gruszczynski, 2020). According to WTO, merchandise trade would have decreased by 13-32% in 2020.

The European Union (EU) is one of the key players in the global trade along with the USA and China. In 2019, the EU, USA and China counted for 43% of the world trade. The EU is the second-largest exporter and importer of goods globally (Eurostat, 2020). The international trade in the EU and non-EU countries is determined by GDP, geographical distance, membership (Beck, 2020), and commercial cooperation (Maciejewski & Wach, 2019). The EU also tackles the crisis. The estimation of WTO for 2020 was that in EU27 the export would drop by 12-33% and import by 10%-25%.

Key Terms in this Chapter

Balance of Trade: A part of the current account that shows the difference between the monetary value of a country's imports and exports over a given period of time.

Economic Liberalism: The promotion of economic activities that arestrictly regulated by the rules of free trade and competition.

Four Freedoms: Free movement of people, goods, services, and capital. This is the fundamental pillar upon which the EU common market rests.

Economic Crisis: Economic crisis in a situation when the economy has a slowdown of economic activities due to financial/bank crisis, inflation, currency crushes, or sovereign debt.

Protectionism: Economic policy that comprises a set of government measures aimed at protecting domestic production from the international competition in order to maintain or gain economic independence.

International Trade: Economic activity that comprises the exchange of goods, services, and intellectual property products among various national economies.

Interventionism: The situation where the traditional protectionist instruments (such as tariffs, contingents, and quotas) are applied along with some stronger and more efficient measures such as import and export bans, foreign currency control, price dumping, subsidised export, local currency devaluation, state monopoly on the foreign trade, etc.

European Union: The European Union was established in Maastricht in 1992 when the Treaty on European Union came into force on 1 November 1993. The European Union was defined through the institutional framework that rests on three pillars. The first pillar comprises European Communities (ECSC, EEZ, and Euroatom). The second pillar is Common Foreign and Security Policy, and the third pillar is the Police and Judicial Co-operation in Criminal Matters.The main EU objectives are: economic and monetary cohesion and common currency, common foreign and security policies and gradual building of a common defence policy, cooperation in judicial and internal affairs, preservation of the community heritage, etc. On 1 December 2009, when the Lisbon Treaty entered into force the difference between the European Community and European Union ceased to exist by removing the term “community”.

Customs Union: A higher form of trade integration where a group of countries eliminate customs duties and other forms of trade barriers among themselves, and establish the common external set of tariffs towards the non-members.

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