World Economy

World Trade in Doldrums?

World Trade in Doldrums?World Trade in Doldrums?

Over the last three years, world trade growth has been significantly lower than prior to the global financial crisis. This raises questions about why world trade is in the doldrums and whether it is likely to recover to pre-crisis levels.

On the demand side, weaker global growth has contributed to lower world trade activity and is likely to depress trade growth going forward, BI Middle East reported Sunday.

However, this is not the full story. Other factors, such as the changing structure of supply chains and rising protectionism, have also contributed to lower world trade activity. It is likely that these long-term structural trends will keep world trade growth depressed below pre-crisis levels for years to come.

World trade volumes grew by an average 5.9% a year during 1980-2008, collapsed during the 2009 recession that followed the financial crisis to -10.6%, and bounced back in 2010-11 to 9.6% on average. However, in 2012-14, annual growth in world trade volumes has been relatively weak at 2.8%. Part of this slowdown is attributable to weak global demand. World GDP growth was 3.3% in 2012-14 on a purchasing power parity (PPP) basis, compared with 3.6% in 1980-2008.

  GDP Growth

Additionally, world trade has typically been 1.6x global GDP growth. This suggests that world trade should have grown by 5.3% in 2012-14, whereas its growth rate has been even slower than global GDP growth. What else is holding back global trade?

First, the evolution of China and the US as the world’s largest trading nations is changing the structure of global supply chains. During the last two decades, China has become the world’s manufacturing hub. At the same time, China has reduced its reliance on other countries for inputs to its supply chain.

Second, rising protectionism may be holding back trade growth. In late 2008, in the aftermath of the global financial crisis, G20 leaders pledged a standstill on trade protectionism to avoid a repeat of the trade protectionist spiral of the 1930s.

However, numerous measures have been introduced since then in contradiction to this pledge. In 2012, the EU released a report that identified a “staggering increase in protectionism around the world”. According to the Global Trade Alert website, over 70% of new trade rules are protectionist and almost 3,870 such measures have been introduced since 2008.

Last but not least, tariff barriers have been falling steadily over recent decades, but at a slowing rate. Since the 1980s, the fall in tariff barriers has been most dramatic in developing countries — average tariffs were about 30% of trade in 1980, 15% in 2000 and are currently under 10%, but are now only falling slightly each year. The boost to trade from lower tariffs has therefore been gradually declining over time.

Going forward, world trade is unlikely to recover to pre-crisis levels in the short term.