Mexico: The Great Trade Collapse - Research Paper Example

Mexico: The Great Trade Collapse The Great Trade Collapse refers to a sharp decline in trade values during the recent global recession in 2008. Thus, according to Baldwin and Daria, analysis into this slump shows that the decline can be significantly attributed to trade quantities as opposed to trade prices. Therefore, Baldwin and Daria further suggest that this could also be attributed to the rapid decline of the trade values. However, the issue of immense price declines cannot also be overlooked. Thus, following research, the Great Collapse can be attributed to sudden, global synchronization of postponement of purchases. This impact was severely felt by the durable goods sector as opposed to the nondurable goods sector. As a result, international supply chains also played a crucial role with regard to the Great Collapse (Husted and Michael, 55). As mentioned before, the Great Collapse of 2008 can be described in various forms. These forms include the following: It was severe and sudden. This is because the Great Collapse represented the largest drop in global trade values in recent times. Thus, the drop is only rivaled in magnitude by the Great Depression. However, the Great Collapse was steeper in comparison to the Great Depression due to the short spell of time within which the Great Collapse occurred. It was synchronized. This is because according to the World Fact Book, during the Great Collapse, more than 100 nations incurred a drop in both exports and imports. CAUSES OF THE GREAT COLLAPSE According to Caballero, the Great Collapse can ultimately be attributed to the Great Recession which represented a spell of economic slump. However, from an analytic point of view, the collapse can be attributed to various demand shocks. Simalar to the dwindling global demand, commodity prices also fell, thus, resulting in a significant drop in the international trade. Compositional Effect. According to Caballero, the compositional effect expounds on the nature of the demand shock. The shock focused on certain products. These products mainly included durable products such as vehicles and electronics. Therefore, since these products are a large part of the global trade while forming a relatively smaller part of GDP, the sudden drop in their demand produced a diminished impact on the GDP as opposed to global trade. This argument attempts to explain the reason behind the immensely huge impact of the Great Collapse on global trade as opposed to GDP. Synchronicity Effect. The synchronicity effect expounds on the uniformity in occurrence of the collapse. Caballero further states that the synchronicity of the collapse can be attributed to the international supply chains and the causes of the Great Recession. Internationalization of the supply chains contributed significantly to the rapid transmission of the demand shocks. This resulted in the synchronized drop for both imports and exports. With regard to the cause of the Great Recession, it can be attributed to the inception the “fear factor” resulting form the collapse of major investment banks in the US. As a result, there was a synchronized postponement of durable commodities such as vehicles and electronic. In addition, even luxury tourism ventures were postponed. Thus, this effect was rapidly transmitted across the globe, in turn, contributing significantly to the synchronism of the Great Collapse. MEXICO The Great Collapse resulted in numerous concerns in regards to the process of globalization. This was owed to the fact that globalization was immensely credited with the global propagation of the collapse. As a result, numerous countries across the globe were immensely affected by the collapse. One of the most affected nations by the Great Collapse was Mexico. Its trade fell by over 40 percent within a spell of 6 months following the onset of the Great Collapse in September 2008. The county’s exports and imports have since appreciated significantly in recent times. Consequently, according to the IMF website, the country currently boasts of one of the largest GDPs in the world. However, the country suffered right from 2008. This significant slump in the country’s trading has been attributed to its close engagement with the U.S. industrial supply chain. Thus, in order to understand Mexico’s immense demise in bits trading during the Great Collapse, the country’s current account balance has to be analyzed. The following table provides Mexico’s current account balance. MEXICO All Data is in Millions of US Dollars   2006 2007 2008 2009 2010 Current Account Goods, net (6133.00) (10074.00) (17261.00) (4681.00) (3009.00) Current Account Services, net (6441.00) (6455.00) (7056.00) (8168.00) (10158.00) Current Account Balance (4487.00) (8851.00) (16339.00) (6352.00) (5626.00) From the table, it is evident that Mexico is a natural exporter of both commodities and services. This is evidenced by the existence of a surplus in both the country’s goods and services. Prior to the Great Collapse in 2008, Mexico’s economy was buoyed by the increase in prices of most of its exports such as oil and automobiles. This can be evidenced by the consistent growth of the country’s balance coefficients in these years. However, the Great Collapse of 2008 had an immense impact on Mexico’s economy. As a result, there was a significant drop in the balance coefficients as evidenced by the table. However, by 2010, Mexico’s economy gradually picking up as is expressed by the balance of accounts as earlier depicted. As mentioned before, Mexico is a natural exporter of both commodities and services. The country is the leading automobile producing nation in the North American region. In addition, other commodities and services produced by Mexico include oil, manufactured goods, industrial exports, electronics, and food, banking and funeral services. However, the country’s close connection with both the US and Canada can not be overlooked. For instance, the country’s citizens operating in the US are responsible for 0.2 percent of the country’s GDP. This represents the 10th largest source of foreign exchange for the country. Moreover, both Canada and the US account for about 50 percent of the country’s exports and imports. This explains why Mexico experienced an enormous slump during the 2008 Great Collapse. As mentioned before, the Great Collapse of 2008 was owed to the collapse of key banking institutions in the US, thus culminating in the Great Depression. Therefore, inception of the Great Collapse can be attributed to the failure by the US to closely monitor its banking systems. Since the US is a natural importer, the country played a crucial part in Mexico’s balance of payments. Thus, failure by the US to consume Mexico’s numerous commodities and services produced resulted in the slump of the country’s trading system. Mexico’s enormous slump in 2008 can also be attributed to the nature of the country’s manufacturing industry. The industry is controlled by both imports and exports. The parts to be assembled are first imported before being assembled into semi-finished products that require final assembly. These semi-finished products are then exported. This system of a manufacturing industry relies heavily on both imports and exports. Thus, the Great Collapse of the international trade systems dealt a significant blow to Mexico’s vibrant manufacturing industry, thus, resulting in the slump. This implies that Mexico’s immense collapse in 2008 can be attributed to its overreliance on an extremely volatile mode of manufacturing and production. The volatility results from the systems overreliance on both exports and imports. Thus, Mexico was immensely affected following the onset of the Great Collapse in 2008. Moreover, integration of Mexico into the U.S. production structure resulted in increased vulnerability to changes in the U.S. economic system. Therefore, Mexico’s immense slump during the Great Collapse can be largely attributed to its close economic relationship with the U.S. As a result of this binding relationship, a slump in the U.S. economy resulted in devastating effects on the dependant Mexican economy. Works Cited Baldwin, Richard and Daria Taglioni. "The illusion of improving global imbalances.” Research-Based Policy Analysis and Commentary from Leading Economists. Web. 15 Aug. 2012. Caballero, Ricardo. "Sudden financial arrest.” Research-Based Policy Analysis and Commentary from Leading Economists. Web. 15 Aug. 2012. "Economy." Central Intelligence Agency: The World Factbook. Web. 15 Aug. 2012. Husted, Steven L., and Michael Melvin. International Economics. Boston: Addison Wesley, 2010. Print. "Report for Selected Countries and Subjects." IMF -- International Monetary Fund Home Page. Web. 15 Aug. 2012. Read More