The global economy is unlikely to see the same heated growth in trade that fuelled globalisation before the 2008 financial crisis largely because China’s manufacturers are turning inward, according to research by the International Monetary Fund and the World Bank.
The study seeks to answer what has been one of the most perplexing questions facing economists in recent years: does a continuing slowdown in the growth of international commerce mean globalisation has peaked?
For the past two years world trade has expanded more slowly than the global economy, the first instance in decades of that happening. The shift has seen the apparent end of what some economists have called an era of “hyperglobalisation”, during which international trade reliably grew at double the pace of the global economy.
Many economists have blamed the recent slowdown in trade growth on the crisis and the economic malaise in the EU, arguing that once Europe bounced back so too would trade. The slowdown has also been attributed to a slower pace of trade liberalisation in recent years.
But in their latest research, economists from the IMF and World Bank say that much of the slowdown in trade growth is structural. For that reason, accelerating international trade is unlikely to be the same contributor to broader growth that it was in the past, they say.
“That particular engine appears to have exhausted its propulsive energy for now,” the team writes in the upcoming December issue of Finance & Development, an IMF magazine.
The evolution of global supply chains is what drove much of the rapid growth in international trade in the 1990s, they argue. But in recent years China, now the world’s largest trading nation, has grabbed a growing share of those supply chains thanks to foreign investment and a focus on the development of new factories at home.
In 1993, imported parts made up more than 60 per cent of Chinese exports, the IMF and World Bank economists point out. But that number has fallen steadily since and imported parts now account for just 35 per cent of exported goods from China.
The result is that while China was a leading contributor to globalisation, it had, even before the 2008 crisis, begun to “globalise internally”, said Aaditya Mattoo, who heads the World Bank’s research on trade.
“This is not just a post-crisis phenomenon,” said Mr Mattoo. “This was a bigger structural thing that set in earlier.”
Mr Mattoo and his co-authors argue that the structural nature of the trade slowdown might have consequences for the world’s growth potential and therefore add to the case that the global economy is facing a “new normal” of slower growth.
But their work will also add to a debate over what a growing number of economists see as the increasingly misleading nature of international trade statistics.
Economists at the OECD, a group of mainly rich countries, and the World Trade Organisation have over the past 18 months been leading an effort to convince policy makers to look at “value added” measures of trade. Those, they argue, offer a more accurate portrayal of what are often politically sensitive trading relationships. Viewed in terms of value added, the US trade deficit with China, for example, narrows considerably.
Mr Mattoo and his co-authors also argue that we are only just beginning to understand the increasing role of services in globalisation, their impact on international trade and how we measure exports.
For example, consider the production of a T-shirt in Mexico with cloth imported from the US that is eventually exported back to the US for sale to consumers.
Traditionally it would have shown up in international trade statistics as an export of cloth from the US to Mexico and a subsequent and separate import of a T-shirt from Mexico to the US. Increasingly, economists argue that it is more accurate to record that simply as an export of tailoring services by Mexico to the US.
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