The Great Synchronization

From the Vox blog, a post by Sónia Araújo and Joaquim Oliveira Martins

The current trade crisis is a uniquely synchronised fall. A pattern standing out from Figure 4 is that periods of abrupt decline of total trade flows were not uncommon at the individual country level, but these drops were not occurring simultaneously. The unique feature in the current crisis is the negative growth rates exceeding -10%, from November 2008 onwards for all six countries depicted,3 with the fall increasing to more than 20% as of January 2009.

Figures 4-5 try to uncover this striking synchronisation with an aggregate indicator. The figures display, for exports and imports separately, the percentage of OECD countries that exhibit a monthly year-on-year trade growth rate that is: i) negative, ii) below -5%, and iii) below -10%. To focus on the current decline, the analysis includes all 30 OECD member countries since January 1998.

The remarkable degree of synchronisation emerges rather neatly. There have been episodes of synchronised trade declines, namely following the dot.com crisis and September 11, but by end-2008 suddenly more than 90% of OECD countries exhibit simultaneously a decline in exports and imports exceeding 10%. It is the synchronised and large drop in trade in every OECD country that explains the collapse in international trade.

At this scale, psychology is not the right modeling tool. "Animal spirits" are real, but they do not provide an adequate explanation for how behavior gets correlated across continents. Click on the "Sync" category at the right and explore some of the mathematical models of sync. Markets are global now; market price signals are a mechanism for an all-to-all coupling of trade flows. The Kuramoto Model could provide insight into global sync of trade flows.