The recent downward revisions by the World Trade Organisation of their predictions for global trade volume growth in 2016 have caused a bit of a stir.
In particular, a graph in their press release suggests that the ratio of trade volume growth to real GDP growth is expected to fall below 1 for the first time in 15 years in 2016: a symbolic moment.
Global trade volumes grew on average at roughly twice the rate of real GDP growth before the global recession. Since 2012, the ratio has fallen to about 1 – they have grown at approximately the same rate. Why is this the case? A couple of recently published reports by the ECB and the IMF have carefully examined the trade slowdown.
The ECB report suggests that about half of the decline in the ratio is due to “structural trends” such as declining transportation costs, lower trade barriers through lower tariffs and a lack of further expansion of global value chains, among others. Essentially, the world has largely exhausted the possible gains to be made on these fronts which were sparking trade growth previously, so now trade growth is unsurprisingly lower.
In chart form, this is most easily seen with respect to transport costs and tariffs.
As can be observed, both transport costs and tariff rates have fallen substantially since the 1990s, and now there is very little extra dynamism that can be extracted from these sources.
The ECB report summarises: “Overall, the evidence suggests that the recent weakness in trade may constitute a “new normal” for medium-term global trade growth. Some of the structural factors that supported rapid trade expansion in the past, such as expanding global value chains, reduced transport costs, declines in tariffs and support from financial deepening, seem to have largely run their course. In this sense, buoyant trade dynamics in the 1990s and early 2000s may have been what was exceptional, rather than the slowdown over recent years.
There are just a few rays of optimism that the report highlights. Dampened investment caused by negative shocks in emerging markets and oil exports should eventually unwind, providing some impetus for trade growth in future. New trade agreements in the southern hemisphere may also help. Putting all the factors together though, the ECB concludes: “The upside potential for trade over the medium term appears to be limited. Hence, the new normal for global trade can be expected to look broadly similar to the weakness observed over recent years.”
Sources: WTO, ECB, IMF
Author: David Buckby