Global Economy
Globalisation maybe stalling as trade growth remains weak
By Michael Hennigan, Finfacts founder and editor
Apr 15, 2015 - 5:48 AM

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Growth in the volume of world merchandise trade will pick up only slightly over the next two years, rising from 2.8% in 2014 to 3.3% in 2015 and eventually to 4.0% in 2016, WTO economists announced Tuesday. Trade expansion will therefore remain well below the annual average of 5.1% posted since 1990 giving rise to fears that globalisation maybe stalling.

The modest gains in 2014, marked the third consecutive year in which trade grew less than 3%. Trade growth averaged just 2.4% between 2012 and 2014, the slowest rate on record for a three year period when trade was expanding (i.e. excluding years like 1975 and 2009 when world trade actually declined).

Roberto Azevêdo, World Trade Organization director-general, said on Tuesday: "Trade growth has been disappointing in recent years, due largely to prolonged sluggish growth in GDP following the financial crisis. Looking forward we expect trade to continue its slow recovery but with economic growth still fragile and continued geopolitical tensions, this trend could easily be undermined.

“But we are not powerless in the face of this gloomy picture. Trade can be a powerful policy tool to leverage economic growth and development. By withdrawing protectionist measures, improving market access, avoiding policies which distort competition and striving to agree reforms to global trade rules, governments can boost trade and seize the opportunities that it offers for everyone.”   

In the short-term at least, trade expansion will no longer far outstrip overall economic growth as had been the general pattern for decades. The 2.8% rise in world trade in 2014 barely exceeded the increase in world GDP for the year, and forecasts for trade growth in 2015 and 2016 only surpass expected output growth by a small margin

Until the global financial crisis escalated in 2008, global trade typically grew at twice the rate of the global economy and China had a significant role.

IMF economists, Cristina Constantinescu, Aaditya Mattoo, and Michele Ruta, say in a December 2014 article in Finance & Development: "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...the decline in China’s trade elasticity may well be a symptom of a further change in that country’s role in international production. There is some evidence that China's international supply chains may have matured in the early 2000s, resulting in lower responsiveness of Chinese trade to GDP. This development is reflected in a fall in the share of Chinese imports of parts and components in total exports, which decreased from its peak of 60% in the mid-1990s to the current share of about 35%."

The economists in an IMF working paper 'The Global Trade Slowdown: Cyclical or Structural?,' published in January 2015 noted that:

An interesting question is whether the decline in trade elasticity has implications for global growth. Paul Krugman, commenting on the global trade slowdown, recently noted that “The flattening out of flattening [sic] is neither good nor bad, it’s just
what happens when a particular trend reaches its limits” (Krugman, 2014). While our findings support the view that the slowdown is the result of a specific trend in international trade that may be leveling off, the flattening may nevertheless have real consequences. Specifically, the changing long-term relationship between trade and income that underpins the trade slowdown is, in part, a symptom of changing international production relations. To the extent that a finer international division of labor is isomorphic to factor-augmenting technical change (Grossman and Rossi-Hansberg, 2008), a slower pace of its expansion could indicate that world trade is contributing less to global growth today than it did in the long 1990s. This issue merits further investigation. Looking ahead, there is still considerable scope to enhance the international division of labor by drawing in regions that have been at the margin of global supply chains, such as South Asia, Africa and South America. But how and when these untapped opportunities will be seized, is an open question.]

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