Formerly soaring global trade suddenly comes to a halt

— -- The unstoppable force has stopped.

With economies in the United States, Europe and Japan slowing simultaneously, the World Bank says that global trade will shrink next year by more than 2%. That will mark the first time in more than a quarter century that the seemingly inexorable tide of globalization will be in retreat.

"Trade tends to be extra responsive to changes in income. When the world economy contracts, trade contracts even more rapidly," says economic historian Douglas Irwin of Dartmouth College.

The trade slump is both symptom and cause of the current global economic distress. For the U.S. economy, which just a few months ago was getting almost all of its forward momentum from net exports, "Trade will be a substantial drag on … growth," Ian Shepherdson, chief economist of High Frequency Economics, told clients in a recent research note.

Compounding the recessionary gloom, trade is being choked by the credit crunch, which is drying up routine export financing. Entering 2009, the open trading system that has delivered low-cost goods to American consumers while lifting tens of millions of people in developing countries out of poverty faces the danger of protectionism in countries such as China, Russia, France and, potentially, the U.S.

Trade's turnaround has been abrupt. As recently as 2006, global trade was surging at an annual rate of nearly 10%. This year, the total volume is still expected to grow more than 6% to about $14 trillion. But, with the Economist Intelligence Unit forecasting 29 national economies will shrink next year, demand will slump for products worldwide.

"Everything is down significantly, across the board in all sectors," says Peter Keller, president of the North American operations of NYK Line, a 123-year-old Japanese shipping company. "The trenches are ugly."

Until recently, trade was virtually the sole bright spot in the U.S. economy, with net exports responsible for most second-quarter growth. But the global slowdown is taking its toll. In October, U.S. goods exports fell for the third-consecutive month to $120.8 billion, almost 14% below July's level. And there are signs that new orders are melting amid the economic tumult.

Bright spot no more

After 70 consecutive months of expansion, the Institute for Supply Management export index released Dec. 1 showed falling orders in both November and October. A few weeks ago, Keller's ships were mostly full, thanks to orders placed months ago. Then, business tanked. Now there are mounting worries about retailers' plans for post-holiday orders. NYK announced last week that it would defer plans to purchase 60 ships as it seeks to trim capacity.