Source: Deutsche Bank Research

World trade is recovering from the steep slide during the recession and after seismic shifts in trade relations over past 20 years, more are in store with bilateral trade within an economic region gaining in importance. The European Union leads current global trade with the largest share at 25%.

Deutsche Bank Research says the fall of the Iron Curtain was followed in the early 1990s by a surge in globalisation that sent global exports rising sharply. World trade rose from US$5.4trn in 1990 (equivalent to some 16% of global GDP at 2009 prices) to its all-time high of US$15.5trn in 2008 (24.4%). The global downturn triggered by the financial crisis reduced global trade to around US$10.1trn in 2009. Developments since then have varied widely in the individual countries and regions. DBR says analysing bilateral trade flows is therefore a worthwhile way of tackling economic issues, such as how global imbalances materialise.

DBR economists Steven Schott and Jochen Möbert say that according to "Gravity Theory," the strength of trade flows depends substantially on the economic strength as well as the cultural and geographical proximity of trading countries. As is to be expected, the Single European Market’s 25% share of global trade makes it the biggest region for the exchange of goods worldwide. As in the EU, the virtual absence of tariffs in the North American Free Trade Association (NAFTA) also stimulates the intra-continental exchange of goods. Trade between the NAFTA countries  -- US, Canada and Mexico  -- represents about 6% of global trade. Strong US consumer demand in particular leads to vigorous goods flows.  One major beneficiary of this is the Chinese export industry. US exports to China by contrast are much lower, which has widened the US’s bilateral current account deficit dramatically. In 2009 China‘s net export surplus to the US was US$146 bn. In 2008 - -  a year marked by the crisis - - the surplus reached a record US$ 181 bn.

The economists say that within the last 20 years there have been some seismic shifts in trade relations. In 1990 for instance, Canadian exports to the US were the world’s biggest trade flow, accounting for 2.8% of the total. Whereas at that juncture China‘s bilateral external trade relations were minimal - - amounting to less than 0.3% of world trade in each case - - just ten years later Chinese exports to the US had expanded to represent 0.8% of world trade. In 2009 this share reached a new record of nearly 2% and knocked Canadian exports to the US off the top spot as the biggest trade flow. Mexican exports to the US have also increased sharply over the past decades. Their relative share of world trade climbed from 0.6% in 1990 to 1.3% in 2009. This illustrates Mexico‘s increasing importance as an extended workbench of the US. By contrast, the relative weight of Japanese exports to the US fell sharply from nearly 2% in 1990 to 0.8% in 2009. While Europe, North America and Asia are very actively integrated into the global trade in goods, Africa and South America are only of minor significance for global export flows. In 2009 for instance, no country in the southern hemisphere posted a bilateral trade flow of at least 0.3% of global trade.

Source: Deutsche Bank Research

The economists say in the short term in the recovery phase of the cycle there is no alternative to “more of the same”. In the past 20 years many emerging markets and especially the new export world champion China have developed into the workshops of the world. The Chinese stimulus programme worth over US$500bn that was approved during the crisis helped to cushion the blow from the global slump in exports. In particular China’s trade with its Asian neighbours picked up considerably. Besides intra-Asian trade the flow of goods between China and the US especially will continue to expand in future. The impact of the ongoing currency dispute between the two countries will be felt at most at the level of growth rates. The US imposition of punitive tariffs on imported Chinese goods would be interpreted as a tool for applying political pressure to force China - - in a similar way to Japan as long as 25 years ago in the Plaza Accord - - to revalue its currency. The accompanying depreciation of the US dollar will contribute to reducing the US current account deficit or the global imbalances.

In the medium to long term, Schott and Möbert say the current accounts will undergo adjustment processes and there will be considerable changes in the bilateral trade flows. In view of the growing integration into the global trade system of the Asian countries  -- first and foremost China, Japan, South Korea, India, Vietnam and Indonesia - - trade with and in Asia will continue to become more important. The existing global current account imbalances could, however, shrink considerably in future. In autumn 2009 at the World Economic Forum in China, the Chinese prime minister Wen Jiabao declared his intention to boost private consumption. Currently its share of Chinese GDP is less than 40% (by comparison, Germany’s share is nearly 60%, while in the US the figure is higher than 70%). In the other aspiring Asian countries, too, private consumption will presumably increase. The US export industries such as IT and pharmaceuticals should benefit from this. But new US products could also reduce the US current account deficits in the coming years. This at least is the declared objective of the export initiative announced by Obama which aims to double US exports over the next five years.

Bilateral trade within an economic region has observably become more important. In addition to the major global trading blocs - - EU, NAFTA and South and East Asia - - the MENA region (Middle East & North Africa) and South America will in future also see expansions in trade. Another key factor for the volume of bilateral trade flows is the economic strength of the core country. In NAFTA this is impressively embodied by the US. Neighbouring countries also derive substantial benefit from a consumption-happy core country, as shown for example by the significant export flows from Canada and Mexico to the US. In Asia this role will be taken on by China in future. One factor that will contribute towards this is the expanding and increasingly consumption-oriented Chinese middle class.

Schott and Möbert say that in Europe this position as the core country could only be adopted by Germany, given its status as the continent’s biggest economy. For this, however, Germany’s domestic demand would need to grow faster in future and the European Union member states would have to be able to export more goods to Germany. The country that would especially benefit substantially from this would be France, Germany’s most important trading partner. Increased German domestic demand could also gradually reduce its bilateral current account imbalances. Countries with low increases in domestic demand tend to post current account surpluses, while countries with high domestic demand are more likely to report current account deficits (see Figure 2). High domestic consumption would also help Germany to achieve more organic economic growth. This could also reduce Germany’s strong susceptibility to global economic developments and the fluctuations in world trade.