This was due to a variety of factors, including the liberalization of trade and capital flows and the decline in the cost of international transportation and especially communications. Business strategies have also become increasingly international, and today a significant amount of world trade occurs within global value chains, that is, international systems of production typically governed by lead firms who coordinate sometimes elaborate networks of suppliers.<sup>3</sup> As a result of these factors, changes in the value and volume of trade over the business cycle are greater today than they were in the 1960s.

In this paper we address three questions: (i) Will trade volumes rebound in a symmetric fashion as world economic growth rebounds?

(ii) Will the crisis result in a change in the structure of trade, in particular will it lead to a reversal of the pattern of more diversified sourcing and thus to a consolidation of global value chains?

(iii) What policies can improve the prospects for developing country growth in the event that trade volumes do not rebound symmetrically and there is a consolidation of some global value chains?

Previous research shows that on average over business cycles since 1975 the effect on international trade is (a) larger than the effect on GDP and (b) symmetric, like the movement of GDP. The 2010 International Trade Statistics released by the World Trade Organization (WTO) suggest a similar pattern for the recent crisis: after the sharpest decline in more than 70 years, world trade is set to rebound in 2010 by growing at 9.5%, assuming a 2.9% global GDP growth.<sup>4</sup> However, the recent downturn has been deeper and different from previous downturns, so there is a greater likelihood of a lag in the recovery of the volume of world trade. It has involved a credit crunch, and thus a collapse of trade credit. The crisis might also have brought a structural change in aggregate demand as US consumption, for example, may settle at a lower rate relative to income, and as the Chinese yuan is revalued relative to the dollar, further shifting the world pattern of trade. We therefore suggest that those factors will affect the pace and pattern of trade recovery.

Regarding the second question, we undertake an empirical analysis of the change in the concentration of trade flows, using a Hirschman-Herfindahl index that measures concentration in terms of trade flows by country rather than in terms of market share by firms. We find that consolidation has been more likely in “buyer-led” global value chains and greater dispersion in “producer-led” global value chains. Regarding the third question, we briefly discuss the prospects for developing country fiscal stimulus and for South-South trade expansion. Our preliminary analysis shows that there is promising growth potential for South-South trade based on the experience of the past 20 years, but that this growth too may be limited if global value chains are consolidated, since the largest category of South-South trade is in intermediates.

This paper has six sections. In Section 2 we briefly assess the degree of developing country export success over the past 20 years in both goods and services. This success has created a greater reliance on export revenue in aggregate demand. In Section 3 we look in more detail at the role of GVCs in the decline in US and EU import demand between 2008 and the third quarter of 2009, including estimates of the US income elasticity of import demand during the crisis compared to long-run elasticities, and a discussion of the possibility of a shifting V-curve of import demand. In Section 4 we look more closely at the sectoral and developing country impact of the import decline in the US and EU. In Section 5 we propose a theory of vertical and horizontal global value chain (GVC) consolidation. We then present data on changes in the

> 3 For a discussion of global value chains, see Gereffi (1994) and Gereffi et al. (2005). 4 WTO, Press Release of March 26, 2010.

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