Wednesday, October 12, 2016

Why is world trade growth slowing?


GLOBAL trade is in a grim state. Between 1985 and 2007 trade volumes shot up at around twice the rate of global GDP; since 2012 the rate of growth has barely kept pace. Things appear to be getting worse. On September 27th the World Trade Organisation slashed its forecast for growth in trade of goods from 2.8% in 2016 to just 1.7%, implicitly predicting that for the first time in 15 years, trade would grow more slowly than GDP. Trade lets countries specialise, it allows ideas to spread and it promotes healthy competition. Policymakers interested in economic growth should be asking why it is so weak. 
Trade depends on a mix of demand and supply in different countries. It can be bunged up by protectionism, and deflated by depressed economies (exports and imports depend on demand). It also depends on more benign factors; the rapid growth of the 1990s and early 2000s was itself unnaturally high. Two forces added momentum to trade over that period: the falling costs of doing business across borders and China’s entry into the global economy. Lower costs encouraged a web of supply chains to form, so that parts that were previously manufactured domestically could be shipped and assembled in foreign countries. Now that costs are not falling as quickly, the process may have run its course. Second, China’s spectacular economic growth over the 2000s was driven by huge increases in investment, which gobbled up imports such as oil and iron. As China switches to a more consumption-led approach to economic growth, the growth in trade volumes will naturally slow. 
Analysis in the International Monetary Fund’s October 2016 World Economic Outlook, published on September 26th, tries to separate out the factors at work. China’s transition explains around a sixth of the slowing growth in Asia’s exports in 2014-15, and less elsewhere. Looking at historical relationships between trade and demand, the report finds that the world’s general economic funk is by far the biggest culprit—the IMF expects global GDP to grow at 3.1% in 2016, markedly slower than the 3.4% enjoyed two years ago. Comparing 2003-07 with 2012-15, some three quarters of the trade slowdown is explained by weak global demand. Weak investment growth is a particular drag—in both advanced and emerging economies. Other factors such as protectionism account for a smaller share of the decline in global real import growth annually since 2012. 
This is frustrating for policymakers. Boosting demand sounds nice in theory, but it can be pretty hard to do in practice (as monetary policymakers have discovered). But they are not powerless. GDP growth and trade tend to feed off one another, and so pepped-up trade could start a virtuous cycle. One way is to ratify and implement international agreements to lower trade barriers, such as the Trans-Pacific Partnership between America and 11 other countries around the Pacific Rim, or the Regional Comprehensive Economic Partnership, a trade deal under discussion that includes India and China. But passing these deals requires political will and convincing some disgruntled electorates, at a time when anti-globalisation rhetoric is thick in the air. If politicians really want to boost trade, they could start by trumpeting its virtues.

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