One of the main motors behind the growth of the world economy in recent decades, the expansion of world trade, seems to have entirely lost its mojo. In the next few weeks, there will be vital multilateral negotiations ahead of the WTO’s Ninth Ministerial Conference in Bali on 3-6 December, which will attempt to salvage something from the Doha Round. And there will be further negotiations towards the US-inspired Trans Pacific Partnership, which is still supposed to be completed this year. With protectionism now on the rise, it is crucial that something is salvaged from these talks.

World trade volume has been virtually stagnant in the 12 months ended mid 2013. Zero growth in world trade is normally a sign of impending global recession, not of a sluggish expansion. Furthermore, there are extremely strong reasons for believing that growth in trade is one of the principal contributors to supply-side gains in global GDP, so a slow-down in underlying trade growth involves permanent losses in welfare. What has gone wrong, and what does it mean for the future?

The Trade Slowdown

One of the most reliable rules of thumb in the post-war global economy has been that world trade volume tends to grow at about double the pace of global GDP. For example, from 1990-2008, global real GDP expanded at an annual rate of 3.2 per cent, while world trade volume grew at 6.0 per cent. Since 2008, world trade has grown slightly slower than GDP, so the share of exports in GDP has actually fallen after a 25-year uptrend. Following sharp downgrades to world trade forecasts in both 2012 and 2013, the WTO now expects trade volumes to grow only slightly faster than GDP in both years, and recent data in mid-2013 suggest that further downgrades may be needed.

Causes of the Slowdown

In part, the weakness in world trade has clearly been due to the cyclical slowdowns in the eurozone in 2012, and in the BRICs in 2013. Because trade between the member states inside the eurozone is counted as part of world trade, the euro crisis has had a particularly large effect. But this effect should have been reversing by the middle of 2013, so it is disturbing to see that the decelerating trend in trade flows has continued (though there have been tentative signs of revival in the last couple of months).

The WTO’s latest projections show that the normal 2:1 relationship between trade and GDP growth will be restored gradually over the next few years, but there are many reasons for doubting this. One intractable problem is that the export-led growth model followed by many emerging economies in the last few decades seems to have run into the sands. The sluggish recovery in import demand in the developed economies looks set to continue, implying that the emerging world will need to find ways of boosting their domestic demand so that trade flows within the emerging bloc can expand more rapidly. As the recent pessimistic United Nations report on world trade growth argues, this will certainly not be easy.

But there is another problem, which is the surreptitious rise in protectionist measures that has occurred since 2008. Fears of a repeat of the protectionist disaster in the 1930s were uppermost in the minds of our political leaders when the recession started, and the G20 meetings famously renounced trade controls as a policy option. But the reality has been rather different.

Professor Simon Evenett keeps a very close watch on the creeping spread of protection-by-stealth, using the regular reports of the Global Trade Alert. He reports that G20 members have implemented a total of 1527 beggar-thy-neighbour measures since they adopted their standstill on protection in November 2008, of which 89 per cent remain to be unwound. Furthermore, new controls have been added at an increasing rate in the past couple of years.

The Policy Response

Roberto Azevedo, the new Director General of the WTO, has warned in stark terms about the “paralysis” of the multilateral process for trade liberalisation, and says that the forthcoming ministerial conference in Bali is a “critical” moment, with the deal being “on the brink”. Of course, we have heard that many times in the past few years, as the multilateral negotiations conducted by the WTO have experienced one failure after another.

This time, the organisation has sensibly opted for a “Doha light” agenda which has a greater chance of progress. It is focusing on trade facilitation (which means reducing the border-post bureaucracy which impedes trade flows), and limited reforms in agriculture and development. This is a far cry from the ambitious objectives of the Doha Declaration in November 2001, but it could still have sizeable benefits if agreed. For example, the Petersen Institute reckons that the trade facilitation improvements alone could increase global GDP by $960 billion (1.3 per cent), but we should remain sceptical until the ink is dry on the paper.

Elsewhere, the US is driving progress towards regional trade agreements in its Pacific and Atlantic partnership deals, which together would cover two-thirds of global output. Widely criticised as anti-democratic and anti-Chinese in concept, these deals would nevertheless represent a useful step forward in reducing trade barriers within two blocs of (mostly) wealthy nations. But there are still formidable hurdles to overcome, as explained here by David Pilling and Shawn Donnan.

Supply Side Consequences

It is far from clear whether these different strands of deal-making will be able to offset the effects of the creeping protectionism-by-stealth discussed earlier. The ultimate referee will be the world trade figures, which currently remain in the doldrums. What is clear is that the damaging effects of lost trade are very large. Using methods developed by Gary Hufbauer and Jeffrey Scott at the Petersen Institute [1], it seems that a decline of 3.2 per cent in the quantity of world trade relative to GDP – which is roughly what has happened in 2012-13 – would permanently reduce the level of global GDP by 0.9 per cent.

Economists have become accustomed to the very large output losses caused by the shortfall in demand since the Great Recession started. Some, like Paul Krugman, have started to write about demand-side reasons for secular stagnation, whereby these losses might become permanent. The recent weakness of world trade growth is one reason why permanent losses might arise from the supply side.

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Footnote [1]

World trade volume has risen by 4.8 per cent in the past 2 years, while real GDP has risen by 4.0 percent. If the normal 2:1 ratio had applied, trade would have been about 3.2 per cent higher in 2013. According to Hufbauer and Schott, the long term GDP effects are 46 per cent of the combined change in global exports and imports. This amounts to a trade effect (imports plus exports combined) of $1,504 billion, which translates into a GDP effect of $692 billion, or 0.9 per cent of 2013 global GDP. I have assumed that trade in goods and services have the same effects on GDP. Obviously, these estimates are subject to wide margins of error.

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