Global Economy
World trade is growing slower than economy for first time in 40 years
By Michael Hennigan, Finfacts founder and editor
Nov 19, 2014 - 2:56 PM

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World trade is growing slower than the global economy for first time in 40 years according to research by IMF and World Bank economists.

Trade grew by no more than 3% in 2012 and 2013, compared with the precrisis average of 7.1% according to an article in the December's issue of 'Finance & Development,' the IMF's monthly magazine.

The Financial Times says that many economists have blamed the recent slowdown in trade growth on the crisis and the economic malaise in the EU, arguing that once Europe bounced back so too would trade. The slowdown has also been attributed to a slower pace of trade liberalisation in recent years.

However, the economists, Cristina Constantinescu, Aaditya Mattoo, and Michele Ruta, from the IMF and World Bank argue that  much of the slowdown in trade growth is structural. For that reason, accelerating international trade is unlikely to be the same contributor to broader growth that it was in the past, they say.

The economists says that a look at the ratio of imports to GDP over the past 10 years suggests that there are longer-term components of the current trade slowdown. Although most economies recorded a stable ratio of imports to GDP after the crisis, this flatness in import shares appears to predate the crisis for China and the United States. For these two countries, import volumes as a share of real GDP have been roughly constant since 2005: a “Great Flatness” seems to have set in before the Great Recession, pointing to the presence of longer-term determinants of the global trade slowdown

They analyze the relationship between trade and income for the past four decades and find that the responsiveness of trade to income—what economists call the long-term trade elasticity to income—rose significantly in the 1990s but declined in the 2000s to the levels of the 1970s and early 1980s. In the 1990s, a 1% increase in global income was associated with a 2.2% increase in world trade.

"But this tendency for trade to grow more than twice as fast as GDP ended around the turn of the century. In the 2000s, a 1% increase in world income has been associated with only a 1.3% increase in world trade."

In the 1990s the development of global supply chains drove trade and while in 1993 material parts comprised 60% of China's imports, it is now down to 35%

"The lower share of imported parts and components in total exports does reflect the substitution of domestic inputs for foreign inputs by Chinese firms, a finding that is corroborated by evidence of increasing domestic value added in Chinese firms. But the increased domestic availability of inputs has been linked to foreign direct investment,"  Constantinescu, Mattoo, and Ruta say and conclude: that the structural development may "affect the growth potential of the world economy because trade and income are not independent of one another."


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