25 September 2016
DOHA: Global trade has slowed in both value and volume terms, including falling below global growth in three of the past four years. Growth of the trade volumes has averaged 3.9 percent per year since 2011, down from an average of 7.3 percent from 2000 to 2007. 

Through the first six months of 2016, global goods trade volumes have averaged just 0.1 percent year-over-year growth, the slowest rate since the financial crisis, QNB noted in its weekly 'economic commentary' yesterday. Not long ago, it was difficult to imagine a future without rising global trade and deepening economic integration. 

Governments pushed through trade liberalisation policies, firms cooperated to develop global supply chains and the result was increasing trade flows that drove global growth. But now nearly eight years since the start of the global financial crisis, much has changed. Trade has slowed in value and volume terms.

According to QNB analysts, there have been three major factors underlying the slowdown of global trade. The first factor has been the cyclical downturn in aggregate demand emanating from advanced economies. In the aftermath of the financial crisis, the process of gradually rebuilding balance sheets and deleveraging had a protracted negative impact on consumption and investment. 

Advanced economies' real GDP growth fell from an average of 2.6 percent per year from 2000 to 2007 to an average of 1.6 percent from 2011 to 2015. In response, import growth in advanced economies dropped by nearly half from 6.2 percent to 3.6 percent over the same respective periods. 

The second factor has been the influence of structural reforms in China. Chinese authorities have enacted policies aimed at increasing the on-shoring of production and rebalancing away from the import-intensive investment and export sectors to foster consumption-led growth. 

Considering that China accounts for 10 percent of global goods imports, the impact of these policies will directly slow trade by lowering Chinese imports of capital and intermediate goods. There will also be indirect effects by weakening China's demand for exports from other Asian countries who depend on linkages to China through global value chains (GVCs) and commodity exports. 

Indeed, the gradual influence of this shift has already materialised. According to the International Monetary Fund, Chinese import growth declined from an annual average of 13.1 percent over 2006 to 2011, to 6.1 percent from 2012 to 2015, of which approximately half was attributable to China's economic rebalancing. 

The remaining portion of the decline reflects the weakness in aggregate demand.

The third factor has been the rise of protectionism and slower rate of trade liberalisation. Despite numerous pledges to support trade from the G20, including their most recent meeting in June, member states have increasingly been enacting protectionist measures. 

Based on the database assembled by Global Trade Alert, discriminatory trade measures increased by 50 percent in 2015, of which more than three-fourths were from G20 member states. Additionally, the pace of trade liberalisation has slowed as evidenced by fewer major trade agreements and the difficulty of finalising some of the major deals that have been agreed to in principle. For example, the much heralded Trans-Pacific Partnership (TPP) is yet to be approved by the US Congress and negotiations over the US-EU trade agreement have dragged on for more than three years. This sentiment has been accompanied by politics that is increasingly hostile to globalisation, clearly seen in the recent successful Brexit campaign in the UK and the strong support for anti-trade positions in the current US presidential election campaign. 

On the potential implications of the slower global trade, QNB said the deepening economic integration between countries and the reliance on trade as a source of growth will be increasingly challenged. In particular, emerging market countries will have to look inwards and consider structural reforms to unlock alternative sources of growth. Additionally, the slowing expansion of GVCs that is likely to be accompanied with weaker trade could lower productivity growth. GVCs have been effective purveyors of productivity enhancement by encouraging specialisation and technological diffusion. 

Looking to the future, countries will have to find alternative sources of growth. For example, the world is becoming increasingly digitalised and the flow of information is growing while trade flows decline, a phenomenon that is being called digital globalisation. This could present opportunities in the future.

Indeed, the gradual influence of this shift has already materialised. According to the International Monetary Fund, Chinese import growth declined from an annual average of 13.1 percent over 2006 to 2011, to 6.1 percent from 2012 to 2015, of which approximately half was attributable to China's economic rebalancing.

The remaining portion of the decline reflects the weakness in aggregate demand. The third factor has been the rise of protectionism and slower rate of trade liberalisation. Despite numerous pledges to support trade from the G20, including their most recent meeting in June, member states have increasingly been enacting protectionist measures.

As per Global Trade Alert data, discriminatory trade measures increased by 50 percent in 2015, of which more than three-fourths were from G20 member states. Additionally, the pace of trade liberalisation has slowed as evidenced by fewer major trade agreements and the difficulty of finalising some of the major deals that have been agreed to in principle. 

This fact has been accompanied by politics that is increasingly hostile to globalisation. On the potential implications of the slower global trade, QNB said deepening economic integration between countries and the reliance on trade as a source of growth will be increasingly challenged. In particular, emerging market countries will have to look inwards and consider structural reforms to unlock alternative sources of growth. Additionally, the slowing expansion of GVCs that is likely to be accompanied with weaker trade could lower productivity growth. GVCs have been effective purveyors of productivity enhancement by encouraging specialisation and technological diffusion.

Looking to the future, countries will have to find alternative sources of growth. For example, the world is becoming increasingly digitalised and the flow of information is growing while trade flows decline, a phenomenon that is being called digital globalisation. This could present opportunities in the future.

© The Peninsula 2016