The collapse in world trade volumes at the end of 2008 and beginning of 2009 was exceptional by
historical standards. This paper shows that world demand (to which trade has become more responsive in
recent decades) can explain most of the collapse in world trade, but that tight credit conditions have likely
amplified the short-term trade response. Credit tightening likely accelerated the trade decline through trade
finance constraints and its relatively larger impact on trade-intensive sectors. A portion of the trade decline
remains unexplained, which may reflect a possible breakdown in global supply chains. Looking ahead, the
pace of normalisation in financial conditions and the future evolution of global supply integration will
affect the speed of recovery in trade and global output.
