The Impacts of Global Financial Crisis on Intercontinental Trade

The Impacts of the Global Financial Crisis on Intercontinental Trade
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The Impacts of the Global Financial Crisis on Intercontinental Trade
Introduction
The global financial crisis of 2008-9 caused an overwhelming financial and economic meltdown to the worldwide market and consumers alike. The crisis was set in motion in August 2007 and reached its peak in September 2008, triggering the subprime mortgage crisis in the United States that subsequently created a severe credit crunch. The severe credit crunch made it impossible for households to borrow, and difficult for businesses and banks to refinance, thus translating into a full-blown global financial crisis. Parallel to the global financial crisis was the total trade collapse of global trade that was associated with a rapid decline in world trade starting in the third quarter of 2008 until mid-2009. The cause of the global financial crisis cannot be attributed to a single cause. Notably, excessive borrowing and risk-taking by households, businesses, and banks, excessive liquidity and massive inflow of foreign money from select Asian and Middle East countries contributed the most. Thanks to the global financial crisis, virtually every economic entity in the world had experienced a downturn, ranging from the financial services industry, the auto industry, and the financial markets, resulting in the collapse of international trade.
What began loosely as a credit crunch in the United States, it quickly escalated into a financial crisis of global proportions. Eun and Resnick (2015) note that many Collateralized debt obligations (CDOs) got stuck in the debt of risky mortgage-backed securities (MBS), which had not been placed as subprime foreclosure rates around the United States escalated (p. 289). Notably, the 2007-8 financial crisis did not spare any country or market sector, including the traditionally independent nations (Viswanathan, 2010). Himpler (2018) asserts that the global financial markets incurred a loss estimated to be $10 trillion within July and August 2007, representing 40% of the worldwide wealth (p.116). Never has the world witnessed such enormous destruction of economic wealth within such a short time. Countries around the world were experiencing a series of the financial meltdown. In China, for instance, 10 million industry-employed employees lost their jobs due to the crisis (Himpler, 2018). Throughout the world, different countries experienced different levels of economic turmoil depending on their respective exposure.
The Onset of the Global Financial Crisis
A summary of the onset and the aftermath of the global financial crisis gives a mere glimpse of the extent of damage the crisis had on international trade. The credit crunch that began in the United States in the summer of 2007 can be attributed to three main factors. These include the liberalization of banking and securities regulations, a global savings gut, and an environment of a low-interest rate that was enabled by the Federal Reserve (Eun and Resnick, 2015, p.285). The liberalization of the banking and securities regulation blurred the functioning of commercial banks, investment banks, insurance companies, and real estate mortgage banki...