| Summary: | This paper focuses on the sluggish growth of world trade relative to income growth in recent years. We use a simple empirical strategy based on an error correction model to assess whether the global trade slowdown is structural or cyclical. An estimate of the relationship between trade and income in the past four decades reveals that the long-term trade elasticity rose sharply in the 1990s, but declined significantly in the 2000s, even before the global financial crisis. These results suggest that trade is growing slowly not only because of slow GDP growth, but also because of a structural change in the trade-GDP relationship in recent years. The available evidence suggests that a key driver of structural change over the 2000s is the slowing pace of international vertical specialization, which accounts for between one-quarter and one-half of the decline in import growth from the 1990s to the 2000s.
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