Report forecasts trade rebound

The fall back in the growth of world trade is bottoming out. In the coming years, trade growth will accelerate and start to outpace global economic growth, though there will be no return to the halcyon days of the 15 years prior to the financial crisis.

A new report by ING, 'The world trade comeback', dismisses suggestions that the slowdown in world trade in the post financial crisis period is permanent and that globalisation – the driving force of the global economy in recent decades – has ground to a halt. The report finds that the ratio of world trade growth to GDP growth will rise, but is unlikely to return to the elevated levels of the 15 years before 2008, and notes that in the long run trade could be negatively affected by emerging trends such as 3D printing, increasing use of robots and growing local-to-local production.

Historically, world trade has almost always grown faster than global GDP since the 1950s. The average ratio of world trade growth to GDP growth from the 1950s onwards is 1.7 times: a 1% increase in GDP growth was associated with a 1.7% increase in world trade. However, in the 15 years before the financial crisis – as trade was buoyed by the structural changes such as the introduction of global value chains and the opening up of China and greater integration in the EU – the ratio reached 1.9 times. The ratio is historically far from stable, however. The report shows that a decline in the ratio of world trade growth to world GDP growth is common in economic downturns. During the early 1980s recession, the ratio fell to around 1.0 times, just as since 2012. Nevertheless, the fall to 1:1 after 2011 is unprecedented and raises the question whether the set back is permanent.

... it seems logical to think that the expansion of free trade will be on hold for some time.

Demolishing post-crisis myths
“The idea that there is little future for globalisation as the engine of economic growth seems plausible because the popular view is that rampant growth of unregulated free markets brings about accidents like the banking crisis of 2007/2008: as a consequence it seems logical to think that the expansion of free trade will be on hold for some time,” says Raoul Leering, head of international trade research, in the economics department of ING Commercial Banking, and author of the report.

“However, the arguments that support the view that the slowdown of trade is permanent are exaggerated,” says Leering. “Take for example the deadlock in the Doha negotiations, often put forward to underpin that globalisation is on hold. The multilateral Bali agreement of December 2013 on lowering customs procedures, which are often a major barrier to efficient trade proves this statement wrong. It marks a major achievement in multilateral trade agreements. Getting goods out of port quicker in Brazil or India will lower the costs of trade and ultimately generate increased world trade.”

Another widely reported myth is that the trend on reshoring, which is the repatriation of manufacturing from low wage countries, means that offshoring has ceased. “Reshoring is undoubtedly growing but that does not mean that offshoring is out of the picture as a major driver of trade,” says Leering.
Similarly, while global trade was boosted because of the integration of China, the former Soviet Union and other emerging markets into the global economy in recent decades, it is simplistic to assume that these trends have come to an end. “There is still plenty of potential for further integration of big emerging markets such as China, India and the Philippines into the global economy,” says Leering. “These countries continue to have low inward foreign direct investment relative to GDP when compared to developed countries. The big bang that happened in the 1990s and 2000s isn’t going to be repeated but economic integration is far from over.”

Other factors widely held to be responsible for a decline in the relationship between world trade growth and GDP growth are also disproved in the report. “For example, the attention focused on the trade conflict with Russia and the heated debate surrounding the Transatlantic Trade and Investment Partnership negotiations between the US and the EU have some commentators claiming that protectionism has been on the rise since 2008,” says Leering. “However, the reality is different: governments appear to have learned from the mistakes of the interwar period and been influenced by pressure from their own corporations that need to trade because their production is organised in global supply chains. Protectionist measures have only been applied to 1% of all cross-border trade flows and have therefore had no demonstrable impact on world trade.”

Equally, while it is true that the long and deep downturn in Europe has disproportionally affected global trade (Europe is over represented in world trade), Europe’s weakness has also pushed down world GDP so the impact on the ratio of trade growth to GDP growth has been small at just 0.1 percentage points. ‘The collapse of the ratio is simply the result of the fact that import ratios are no longer rising,” notes Leering.

A return to normal
The increase in global trade anticipated by Leering’s report will be beneficial to the global economy and to people worldwide: the report cites research that shows that an increase in the share of trade to GDP by 1% raises income per capita by at least 1.5% – there is a provable link between trade and gains in individual incomes. Moreover, Leering asserts that a significant part of the decline in the ratio of world trade growth to world GDP growth is temporary and that trade growth will return to outpace world GDP growth – although it won’t match the stellar performance of the pre-crisis era.

Equally, in the long-term, robotics and 3D printing have the potential to decrease world trade.

However, there are threats to this scenario. “Risks exist in relation to protectionism: an escalating trade conflict with Russia over the Ukraine situation could cut global trade, for example,” says Leering. ”Equally, in the long-term, robotics and 3D printing have the potential to decrease world trade. There is also a growing local-to-local trend – where companies demand that their suppliers produce locally: either as part of a development strategy, as in China; or reflecting quality or brand considerations, as for the upper end of the German auto market – that could slow world trade in the future. However, these trends are currently small in scale and negligible in impact: 3D printing has a long way to go in terms of cost and quality before it becomes mainstream for consumer products or B2B applications, assuming it ever does,”

Meanwhile, trends are emerging that could help to counter the impact of developments such as local-to-local production and 3D printing: the capacity of free markets to respond to changing market conditions by innovating should not be underestimated. For example, the container shipping industry, which by standardising cargo processing has been an important driver of world trade, is experimenting with light composite materials that would reduce transport costs and spur profitability of trade (not least in relation to the return leg of journeys when cargo ships are usually empty except for the 2,000kg containers themselves).
Furthermore, despite the challenges associated with brokering trade agreements, efforts to strengthen world trade – both on a bilateral and multilateral level – show momentum, according to Leering. “The Bali agreement will push up world trade by 4.1% and world GDP by 1.1%. Bilateral agreements as currently negotiated between Europe and the US (the Transatlantic Trade and Investment Partnership) and between countries surrounding the Pacific Ocean (Trans-Pacific Partnership) are difficult and encounter resistance from activists and vested interests. But they will be important drivers for world trade growth if they can be completed.”

Raoul Leering, ING

Raoul Leering

Head of International Trade Research at ING.






Would you like to know more?

The View is the online magazine of ING Wholesale Banking