World trade expanded by only 1.7% in the financial year of 2016, the lowest pace of trade and output growth since the financial crisis of 2009. This is a sharp downturn from the World Trade Organisation’s expectations of 2.8% in April. The forecast for 2017 has also been revised, with trade now expected to grow between 1.8% and 3.1%, down from 3.6% previously.
Typically, trade has grown at 1.5 times faster than global GDP. However, in recent years the ratio has slipped more towards 1:1, below the peaks of the 1990s which saw world merchandise trade volume grow twice as fast as world real GDP, and below the long-term trend between 1985 and 2007 where trade shot up approximately twice as fast as global GDP. 2016 will be the first time in 15 years that the ratio between trade growth and world GDP has actually fallen below 1:1, having grown this year only 80% as fast as the global economy.
Furthermore, the increase in the number of systematically important trading countries and the shift in the ratio of trade and GDP growth makes it more difficult to forecast future trade growth. This has led the WTO for the first time to provide a range of estimates for it 2017 trade forecast rather than a specific figure.
These disappointing figures can be attributed to a range of factors. After a long period of growth through globalisation and a reliance on global trade, governments have increasingly sought to protect their domestic industries during periods of economic difficulty, and economies are increasingly driven by domestic consumption. Trade volumes also stagnated for most of the year, with weak global investment in both advanced and emerging economies playing an important role, as capital goods typically account for 1/3 of world goods trade.
The rapid growth in the 1990’s and 2000’s was also itself unnaturally high. The falling costs of conducting business across borders and China’s entry into the global economy encouraged global supply chains, ginormous imports of oil and iron, and large investments. Now that China has switched to a more consumption-led approach to economic growth, and international business costs are not falling as quickly, the growth in trade volumes has begun to naturally slow.
From the IMF’s October 2016 publication of the World Economic Outlook, they also expect global GDP growth in 2016 to rise only by 3.1%, considerably slower than the 3.4% experienced two years ago. They also account China’s economic transition to approximately a sixth of the slowing growth in Asia’s exports in 2014-15.
Solutions to expanding trade growth again can be found in the implementation of such trade agreements such as the TPP or the Regional Comprehensive Economic Partnership, a trade deal in discussions including both India and China. However, at a time where anti-globalisation rhetoric has risen to new heights with the rise of Donald Trump and events such as Brexit, convincing political leaders to change their economic policy may require extraordinary will.