World trade has been growing at about half the rate as it did before the Global Financial Crisis (GFC) of 2007-08. The World Trade Organisation (WTO) estimates the growth of world trade in 2016 to be the slowest since the GFC, expanding only by 1.7 per cent. The WTO further projected slower 2017 trade growth than its previously forecast, now expecting a rise of 1.8 to 3.1 per cent rather than 3.6 per cent as estimated before. These projections seem to have become rather tentative, just like the International Monetary Fund’s (IMF’s) World Economic Outlook (WEO), which is updated every six months, and, since the GFC, the record shows that revised global growth in October WEO were always lower than the more optimistic projections of April. This highlights the volatile nature of the global economic environment where a very reasonable forecast even for a year has become very problematic for very highly skilled and professional staff at organisations like the WTO and IMF.
For fifty years following the Second World War, trade growth exceeded global output growth, indicating that trade was actually the driver of output growth globally. Trade grew on average twice as fast as gross domestic product (GDP) from 1990 to 2007. Since the onset of GFC global trade flows in value terms has been slowing down but the slow down became more marked between 2011-15 when world trade grew at a rate of less than 2.0 per cent. This growth rate is lower than global GDP growth rate during the same period. That has raised considerable concern about growth in world trade, indeed there is a growing fear that it might start to stagnate, as is the fear of stagnating world economic growth. Definitely world trade is still being affected by the after-effects of the recession caused by the GFC and ongoing economic crises in different parts of the world, in particular in the European Union (EU). Now the great US EXIT (a la Trumponomics) can only add to the woes of global economic turmoil with corresponding consequences for trade flows.
The bulk of international trade involves trade in merchandise while services account for a much smaller share. In 2015, the former accounted for 79 per cent, while the latter 21 per cent of total global trade. World trade is largely concentrated in three regions, North America, Europe and East Asia. Today, intermediate products represent the largest proportion of merchandise flows, followed by consumer goods and then followed by primary products. The trade slowdown affected all product groups, but to different extents. It has affected all the regions but again very differently. For the South Asia region where Bangladesh belongs, the growth rate on average was very close to zero at 0.5 per cent for the period 2012-2014 compared to 20.4 per cent for the period preceding the GFC (2003-08). The exceptional growth of international trade since the mid 1990s was largely due to drive towards trade liberalisation in countries around the world under the auspices of multilateral agreements (e.g. WTO). This is also the period that saw the formation of EU single market and North American Free Trade Agreement (NAFTA); both of which now face quite formidable challenges in light of BREXIT and Trumponomics.
In the past 25 years, a significant boost to trade resulted from the increasingly growing importance of vertical specialisation whereby production processes are fragmented across countries giving rise to increased trade in intermediate products. Multinational enterprises (MNEs) took advantage of lower cross border transaction costs facilitated by more liberalised trade policies and technological innovations. Such a globally fragmented production process enabled MNEs to exploit comparative advantage of individual countries to achieve global competitive advantage. But the end result is that this has caused a steady increase in trade flows, but especially in intermediate products. This is also another reason why the growth rate in trade flows significantly out-stripped the growth rate in global GDP during this period. Trade flows include all flows including primary, intermediate and final products but global GDP only take into account the market value of final goods and services produced during a particular period of time. Simply put, trade is measured in value terms while GDP is measured in value-added terms. It means that the same intermediate component would be included in measuring trade flows each time it crosses a border. In the current context, the big decline in commodity prices has also reduced the measured value of trade. It is estimated that this accounted for half the fall in trade growth and oil alone contributed a third to this fall.
Trade flows do matter for global GDP growth; and not to be part of trade is to fall behind. To get a clearer grasp of the trade slowdown, we need to put it in the proper perspective. Given that trade performance has always had very intimate relationship with economic growth, a good starting point then could be to look at global output growth in the first instance. Since the GFC, the global economy has been gripped by very high levels of turmoil resulting in significant slowdown in global output growth. The IMF’s flagship publication the World Economic Outlook (WEO) in its October, 2016 issue projected global output growth at 3.1 per cent for 2016 before reaching 3.4 per cent in 2017. But the forecast posted a more subdued growth outlook for developed economies at below 2.0 per cent for 2016- 2017. The poor economic growth performance in developed countries and very subdued growth prospects in developing countries are engendering a fortress mentality which can only negatively impact on trade flows.
Larry Summers (former US Treasury Secretary) ascribed the slowdown in trade to “secular stagnation”, a concept developed by Alvin Hansen in the 1930s. This is a situation where increased saving leads to decreased investment which in turn acts as a drag on demand reducing growth and inflation. Trade relies pretty heavily on investment. Machinery and transport equipment constituted close to half of manufactures trade in 2015 and manufactures accounted for 66 per cent of total merchandise trade during the same year. Here is another difference between trade and GDP composition; the former is about 80 per cent goods and the latter is about 80 per cent services (especially in advanced economies). The most identifiable element in the current slowdown in trade is a big reduction in investment goods as reflected in very low levels of investment around the world. At the same time while tariffs have generally fallen, additional non-tariff measures have been introduced. The most widely used of these measures are the technical barriers (i.e. regulatory measures) to trade. Such measures significantly contribute to increases in transaction costs and sometimes outright prohibition of imports has also been enforced in times of rising protectionist mentality.
Overall, there are both structural and cyclical components to this trade slowdown. The structural factors incorporate such elements as declining in vertical specialisation (GVCs), faltering trade in China and other Asian countries including increasing withdrawal of China from Global Value Chains (GVCs), and changes in the composition of trade and GDP. Now there is empirical evidence to suggest that trade itself has become less responsive to GDP due to a shift in vertical specialisation (GVCs) which increased in the 1990s but decelerated in the 2000s. The cyclical influence on trade flows is reflected in weakness in aggregate demand notably in the EU and more recently in China. There is now both short-term cyclical and long-term structural factors that are working together. However, there is no general consensus on the relative importance of these two components in explaining the slowdown in trade flows.
Given that the trade slowdown is a major symptom of a much deeper economic malaise currently afflicting the global economy; in effect it is a symptom of secular stagnation. Does it then really matter? The answer is a clear yes, it does matter. The slowdown in trade signals declining investment across countries both developed and developing. At the same time we are witnessing weak consumption demand as well. Trade data also reveal that there are shifts in demand away from tradables to non-tradables. Overall, developed countries still dominate international trade accounting for half the value of merchandise trade and two thirds of trade in services. Therefore, economic growth in developed countries, driven by investment and consumption, is the sin qua non for stimulating trade flows.
The trade slowdown has serious implications for countries pursuing export-led growth strategy such as Bangladesh. Global demand, particularly in Organization for Economic Cooperation and Development (OECD) countries – the principal export destinations for Bangladesh exports — plays a crucial role in determining export growth of these countries. Policies that stimulate growth in OECD countries can help prevent global trade — and our exports — from stagnating.
What is strategically important for developing countries like Bangladesh is to be aware that trade growth in the future may be fuelled by factors different from those in the past. There is a clear a logic that if services continue to dominate domestic economic activity (such as in developed countries) why it should be any different in global trade. There are clear signals emerging now that trade in services may be the next engine of trade growth in the future. Trade in services has been growing steadily over the last three decades as reflected in its increasing shares of global trade. Countries like Bangladesh better adapt their trade strategies to take account of this evolving structural shift in the composition of international trade or it could be left behind. Under the changing circumstances it is important for countries like Bangladesh to consider mitigating strategies which may include export diversification strategy including promotion of services exports.
Bottom line: Global trade needs to be stimulated rather than restrained by dubious measures. Meanwhile, many countries are trying to stimulate their exports by using monetary policy instrument such as quantitative easing to expand the country’s money supply, lowering the price of their currency (depreciation) and thereby trying to boost exports. Tax breaks, direct subsidies, and even wage depression are being used to accelerate exports. Surely, these measures can only provide temporary band aids, not solution for durable export growth. That will require creating a macroeconomic environment to promote investment and consumption globally to stimulate growth along with further trade liberalisation – not protection — which can be a part of the solution to expand growth in trade flows. Sustained global trade expansion is what Bangladesh badly needs to attain the coveted goal of reaching upper middle income country status via 8.0% export-led GDP growth over the next decade.
