The recent weakening in global trade analysed

http://www.smh.com.au/business/the-economy/a-return-to-world-trades-glory-days-appears-unlikely-20170714-gxb7ik.html

  • For two decades from the mid 1980’s, world trade grew at more than double the rate of growth in gross world product
    • World trade: exports + imports
  • Between 1986 and 2007, the volume of world trade grew at an average annual rate of 3.4% of world real gross domestic product. This means that it had gone from 30% of gross world product to almost 60%.
  • It dropped in 2008 and 2009 due to the global financial crisis to briefly bounce back in 2010, but since 2011 has grown only marginally faster than the world production of goods and services
  • Globalisation is able to be defined as beginning from the mid 80’s as it was after 1986 that the volume of trade grew rapidly faster than production.
  • Is the weakening in trade growth cyclical or structural?
  • A study by the OECD estimates that about 40% of the slowdown between 2011 and 2015, as compared with the period from 1991 to 2007, is explained by the weak growth of demand in the global economy
    • Particularly the sharp decline in business investment in new physical capital – CAPEX – which is also import intensive.
  • The other 60% lies in multiple factors; one of them being that in the two decades before the crisis, certain factors such as the reduction in tariff and non-tariff restrictions made trade growth exceptionally strong – but these factors have now lost their initial boom.
  • Further, multiple trading agreements were formed: in 1989, the Asia Pacific Economic Co-operation partnership between 21 countries, and in 1992, when the EU moved to a single market in goods, services, labour and capital, increasing trade amongst its members. In 1994, the Uruguay round of multilateral negotiations was reached, extending membership of the General Agreement on Tariffs and Trade from developed countries to about 150 developing countries. It also reached trade agreements covering new areas such a textiles, agriculture, services, and intellectual property (IP). The round turned the GATT into the WTO. Further, NAFTA was established between the US, Canada, and Mexico in January 1994.
  • Trade was also bolstered was the cut in China’s (now the world’s second-largest trading nation) protection levels as a condition of its joining the WTO.
  • The rapid growth in trade in this period was also aided by the development of  ‘global supply chain’, (sometimes referred to as the great unbundling) under which manufactured goods are assembled in one country using inputs from another.
  • Even when trade liberalisation measures slowed in 2000, China’s rapid emergence into the world economy maintained trade growth at high levels.
  • However, these structural sources of growth have since diminished.
  • The halt in the WTO’s Doha round of multilateral negotiations, launched in November 2001, explains roughly a quarter of the slowdown in the growth of trade between 2011 and 2015. Though many bilateral and regional trade agreements have been signed since the first negotiations, the largest agreement, the TPP (signed February 2016), has since been abandoned by President Trump.
  • China’s period of export-led growth has also ended as they seek to move to domestic sources of growth, co-inciding with an inability to stretch global value chains further as countries seek to reinstate jobs back to their domestic citizens.
  • OECD: “Trade and the related expansion of global value chains, boosts growth through increased productivity, by improving resource allocation, increasing scale and specialisation, encouraging innovation, facilitating knowledge transfer, fostering the expansion of more productive firms and the exit of the least productive ones.”
  • The study does acknowledge that the benefits of trade are not shared equally amongst countries
  • This has resulted in a polarisation within political voters, as politicians have failed to ensure those missing out were then compensated by those profiting, further fuelling anti-trade ideology and negating its future growth.
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