Research & Policy Briefs From the World Bank Malaysia Hub No. 12, February 2018 Global Trade: Slowdown, Factors, and Policies Dorina Georgieva, Norman V. Loayza, and Fabian Mendez-Ramos Growth in global trade has been slow since 2012. While global trade downturns are not unprecedented, the observed change in the relationship of trade to GDP poses the question whether the trade slowdown is a transitory deviation or a more long-lasting phenom- enon brought about by structural changes. This new dynamic, coupled with the rise of protectionist policies and rhetoric in many countries, positions trade at the forefront of policy discussions. This brief reviews recent patterns in global trade, examines the factors affecting trade—distinguishing between transitory and structural components of the slowdown—and discusses policies shaping the path of future trade, including the rise of protectionism and the relevance of multilateral and bilateral trade agreements. Recent Patterns in Global Trade since the global financial crisis was 2015. In 2016, growth improved, driven by the Europe and Central Asia and East In the aftermath of the global financial crisis of 2008–09, Asia and Pacific regions. Furthermore, developing countries global trade has not grown at the same rate as in previous experienced more variability of exports and imports growth decades. From 1985 to 2007, world trade grew 6 percent, on than high-income countries. This variability was most average—almost twice as fast as global GDP—while since pronounced in the Middle East and North Africa and 2012, it has been hovering around an average of 3.1 percent Sub-Saharan Africa. (figure 1). During the global financial crisis, the growth rate of traded goods and services collapsed around 10 percent- Primary and manufacturing goods were more affected age points (IMF 2016a). The slowdown was particularly than services. The sharpest decline, however, was in capital pronounced in high-income economies. For example, at the and durable goods given their higher sensitivity to income peak of the financial crisis, trade growth dropped in shocks. Boz, Bussière and Marsilli (2015) suggest that the Germany, Japan, and Spain by 12 percent, 15 percent, and income elasticity for durables is nearly four times higher 20 percent, respectively. than for nondurables. Global trade continues to remain lackluster, despite growth due to increased investment in Since the crisis, the slowdown in global trade has been the third quarter of 2016 and improved external and internal uneven. For example, developing economies largely demand in the first half of 2017 (IMF 2017). sustained world trade growth in 2012 and 2013. High- income countries took the lead in 2014–15, while develop- Factors Affecting the Trade Slowdown ing economies lagged because of declining commodity prices, depreciation of currencies against the US dollar— The decline in trade growth since the global financial crisis accompanied by higher import prices—and macroeconomic can be explained largely by two distinct but interconnected rebalancing in China (Constantinescu, Mattoo, and Ruta factors: transitory and structural. Transitory factors are 2016b). The median growth of exports and imports declined short-lived changes expected to revert to previous levels in a across all regions and among high-, middle- and low-income relatively short period, while structural changes are perma- countries from 2010 to 2016. The worst year for global trade nent or long-lasting shifts in the composition or dynamics of Figure 1. World Trade and World Trade Growth, 1985–2016 World trade as a percentage of world GDP has barely moved since 2010, while world trade growth—measured by exports—was flat from 2011 to 2016. a. World trade as a percent of world GDP b. World trade growth (annual percent change) 70 16.0 6 60 12.0 5 50 8.0 4 40 4.0 3 30 0.0 20 2 -4.0 10 -8.0 1 0 -12.0 0 Trade of goods and services GDP growth (left scale) Gross capital formation Exports of goods and services (left scale) Trade in services Ratio of exports growth to GDP growth (right scale) Source: World Development Indicators and World Bank staff calculations. Affiliation: Georgieva: Development Indicators Group, the World Bank; Loayza: Development Research Group, the World Bank; Mendez Ramos: Development Research Group, the World Bank. Objective and disclaimer: Research & Policy Briefs synthesize existing research and data to shed light on a useful and interesting question for policy debate. Research & Policy Briefs carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions are entirely those of the authors. They do not necessarily represent the views of the World Bank Group, its Executive Directors, or the governments they represent. Global Knowledge & Research Hub in Malaysia Global Trade: Slowdown, Factors, and Policies the economy. While both are important, weaker economic started declining in the 2000s, revealing a slower pace of the activity as fallout of the crisis may explain most of the trade process of vertical specialization through global supply slowdown (Boz, Bussière, and Marsilli 2015, and Aslam, et al. chains. 2017). The development of global value chains in the last two Transitory Factors decades is key to understanding the pattern of trade in an interconnected world (Gangnes and Assche 2016, and Korni- Trade is highly sensitive to changes in economic activity— yenko, Pinat, and Dew 2017). Historically, trade was merely a particularly in the short term. The decline in income in the transaction between two countries. In contrast, over the aftermath of the global financial crisis led to a reduction in past two decades, international trade has involved many the demand for consumption imports, especially durable countries, each contributing to the production of a finished goods. Likewise, lower expectations and higher uncertainty product. This new pattern initially fostered a sharp jump in about future growth caused a fall in investment, inducing a trade growth. Lately, however, the maturation and slower decline in the demand for imported capital goods (Aslam, et pace in growth of global value chains has contributed to the al. 2017). The evidence suggests that the drop of trade overall trade slowdown. growth was sharpest for capital goods, followed by interme- diate goods and then consumption goods (Boz, Bussière, and Having contributed enormously to the expansion of Marsilli 2015, and Aslam, et al. 2017). trade in the 1990s and 2000s, China’s growth reduction and “rebalancing” in the last few years has also contributed to In developing economies, declining commodity prices in the trade slowdown. The rebalancing of the Chinese 2014 and 2015 were a major factor in the slowdown of trade economy has involved several interrelated phenomena, growth (Constantinescu, Mattoo, and Ruta 2016b). In the mainly, more consumption and less investment, less imports first place, lower commodity prices reflected a decline in the of capital goods and more production of domestic interme- demand for commodities, especially in China and advanced diate goods, and less exports to favor consumption countries, and their trade around the world. In the second (Constantinescu, Mattoo, and Ruta 2016b, and IMF 2016a, place, lower commodity prices meant lower income in oil b). These changes are consistent with China’s lower overall and mineral exporting countries, consequently leading to a GDP growth and the economy’s maturation towards devel- contraction in their demand for import goods. opment. Liquidity conditions during and after the financial crisis Finally, it has been suggested that the process of income also played a role in the global trade downturn. Exporting convergence between developed and developing countries and importing firms are more dependent on external financ- may be a structural determinant behind the long-term ing than domestic-oriented firms and, therefore, are more evolution of international trade, as reflected in the decline in vulnerable to financial contractions (Ahn, Amiti, and Wein- the trade-GDP elasticity (Escaith and Miroudot 2015). During stein 2011). The credit crunch had an impact on all aspects the 1990s and 2000s, developing economies converged of trade—exporters’ finance to produce and commercialize, more quickly, given that they had started from a lower transportation costs, wholesale and retail transactions, and income level, but in the 2010s this process is naturally importers’ consumption and investment credit. The trade slowing down. effects were larger in more credit constraint countries, for clients of troubled financial institutions, and for sectors Policies and the Future of Trade more dependent on external financing (Chor and Manova 2012, and Bems, Johnson, and Yi 2013). In an integrated world, international trade will be driven by fundamental forces such as demographic changes, techno- The policy uncertainty that prevailed during the global logical improvements, energy and natural resource availabil- financial crisis and its aftermath also affected trade. The ity, transportation costs, and infrastructure facilities (WTO relationship between policy uncertainty and trade is strong, 2013). It is unclear whether these fundamental forces may negative, and nonlinear (Gangnes, Ma, and Assche 2015). imply a renewed trade expansion or a convergence towards When uncertainty is low, a marginal increase in uncertainty a possibly lower steady-state level. There is little doubt, will have little impact on trade (Taglioni and Zavacka 2013); however, that future trade will be more reliant on digital however, if uncertainty passes a threshold, it can lead to a technologies. The ever-evolving information and communi- significant decline in trade. One empirical study, for instance, cation technologies (ICT) are facilitating the inclusion of finds that 75% of the decline in trade growth rates between more firms in the world economy, opening markets to previ- 2015 and 2016 can be associated with an increase in policy ously isolated workers and enterprises (World Bank 2016). uncertainty during 2016 (Constantinescu, Matoo, and Ruta Their success greatly depends on having the right policies 2017). and institutions, the “analog” complements to the digital Structural Factors technologies (Dollar and Kidder 2017, and Hallward- Driemeier and Nayyar 2017). Structural factors have also shaped the trade slowdown. Some began to change as early as the 2000s. This is Of special importance are public policies related to suggested by changes in the elasticity of trade to GDP international trade. They can support the fundamental (defined as the percentage points by which trade changes forces driving trade and improve their social and economic for a 1 percentage point increase in income). Estimates for effect or they can interfere and disrupt the process of this measure of trade elasticity have ranged between 1 and international integration. There are three major scenarios to 3.5, where higher values illustrate more responsiveness to consider, from least to most optimistic. Under the first GDP. Constantinescu, Mattoo, and Ruta (2016a) find that scenario, global trade growth enters an accelerated decline long-term trade elasticity rose significantly in the 1990s but due to increasing protectionism and conservatism. The 2 Research & Policy Brief No.12 second scenario considers a trade framework where coun- may facilitate trade further by standardizing trade and tries engage more in regional or bilateral agreements. A business regulations and enforcing legal procedures among third scenario involves a reinvigorated World Trade Organi- a larger array of trading partners. zation (WTO) with enforcement powers to pursue deepening worldwide integration. Recent preferential trade agreements are deeper and cover a broader spectrum of measures than tariffs alone. Increasing protectionist policies will weaken the global Figure 3 shows that since the 1990s, the number of agree- trade structure and diminish growth prospects if they mate- ments within regions and intercontinentally increased rialize. The IMF (2016a) emphasizes that the protectionist significantly. Notable examples include MERCOSUR (1991), measures that have been implemented, coupled with slower the ASEAN Free Trade Agreement (1992), NAFTA (1994), and pace of globalization, could have serious repercussions. They the European Economic Area (1994). Deeper and larger could reverse the gains achieved from the mid-1980s to the agreements tend to have a bigger impact on trade growth mid-2000s (Evenett and Fritz 2017) regarding incentives for (Baccini, Dür, and Elsig 2015) and may reduce trade costs for innovation, productivity growth, and technology diffusion nonmember countries, creating a positive spillover effect (Akcigit, Ates, and Impullitti 2017). (Mattoo, Mulabdic, and Ruta 2017). The export gains are The WTO (2016) points out that 2,978 restrictive higher when emerging markets have trade agreements with measures were put in place from 2008 to 2016, and 2,238 of advanced markets (Ahmed Hannan 2016). Deep preferential those were still standing in 2016. The imposition of new trade agreements are also associated with higher trade restrictions may have peaked in 2013, but they still grew by related to global value chains (Osnago, Rocha, and Ruta more than 15 percent from 2015 to 2016. Most G20 and all 2016). G7 countries have increased trade restrictions since the A third trade path involves worldwide trade liberalization, global financial crisis. The United States, India, Russia, and harmonization of procedures, and regulation to promote fair Argentina lead in the number of discriminatory interventions trade (OECD/WTO 2017). This would require a renewal of implemented from 2008 to 2017, whereas South Africa, the WTO, making it more dynamic and forward-looking, Canada, the Republic of Korea, and Mexico have employed especially in the face of new technologies, and providing it fewer (Evenett and Fritz 2017). According to Global Trade with greater enforcement power to ensure compliance by Alert, harmful interventions to trade have exceeded liberaliz- ing measures in trade of both goods and services in each member states. How could this be achieved in the current year over the past decade (see figure 2). state of international affairs? While it may appear counterin- tuitive, the threat of protectionism is an opportunity for the A second possible path for trade policy is the prolifera- WTO to step in and fill in the vacuum with a newfound tion of new bilateral and multilateral agreements. Countries leadership. Although no country today offers leadership and might look for access to other markets and standardize steadfast commitment to open markets, many countries business operations through alternative bilateral and would cooperate if the WTO were to offer an attractive regional agreements. While bilateral trade agreements are forum for countries to engage in international trade and a easier to negotiate and go into effect faster, they can gener- credible institution to enforce international rules and ate a series of competing bilateral agreements among other policies, temper tensions, and mitigate eventual trade countries. Multilateral trade agreements, on the other hand, conflicts. Figure 2. Harmful Interventions to Both Goods and Services Trade Have Exceeded Liberalizing Measures Since 2009 a. Goods trade b. Service trade 1200 2013 2012 120 2009 2014 2015 2016 100 Harmful interventions 1000 Harmful interventions 2009 2014 2010 2011 2011 2013 2015 800 80 2016 2012 600 60 2017 2017 2010 400 40 200 20 0 0 100 300 500 0 5 10 15 Liberalizing interventions Liberalizing interventions 45-degree reference line Source: Global Trade Alert and World Bank staff calculations. Note: Total number of new implemented interventions per year since November 2008. The figure shows all state interventions implemented worldwide affecting commercial trade flows in goods and services (Global Trade Alert 2018). 3 Global Trade: Slowdown, Factors, and Policies Figure 3. Bilateral and Multilateral Trade Agreements Soared in the 1990s a. Total bilateral and multilateral treaties b. Average bilateral and multilateral treaties per geographic location of signatory states 2011-16 350 2001-10 300 Number of treaties 250 1991-00 200 1981-90 150 1971-80 100 50 1961-70 0 1950-60 2001-10 2011-16 1981-90 1991-00 1950-60 1961-70 1971-80 0 5 10 15 20 25 30 35 40 Average per decade bilateral multilateral Africa Americas Asia Europe Oceania Intercontinental Source: Dür, Baccini and Elsig (2014) and World Bank staff calculations. Note: Panel a) shows the total number of bilateral and multilateral treaties per decade. Panel b) shows the average number of bilateral and multilateral treaties across decades and per geographic location of signatory states. Conclusion graphic changes, income convergence across countries, and The global trade slowdown since the global financial crisis especially the evolving information and communication can be explained by both transitory and structural factors. technologies. One consequence is that trade in services will The evidence suggests that most of the slowdown is due to become increasingly more important. Another is that more transitory factors related to the crisis fallout—export people and firms could reach and participate in international demand contraction and tighter financial constraints. markets. The potential beneficial effects of international However, structural factors linked to the maturation of trade are large, indeed. They are, however, under threat of global supply chains and the rebalancing of the Chinese protectionism. 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