Lessons learnt from global trade slowdown
THE slow recovery in global trade since 2012, after the initial rebound from the unprecedented collapse of the 2008-2009 financial crisis, has been the subject of extensive and ongoing research and conference deliberations across the world.
The post-crisis trade slowdown is found to be widespread affecting 84 per cent, or 143, of 171 countries, according to a paper presented at the just-concluded Bank Negara Malaysia-International Monetary Fund Summer Conference held in Kuala Lumpur — first time in this region to discuss globalisation in the aftermath of the crisis.
Emerging and developing economies initially experienced milder trade slowdown but it became more severe during the last three years due to weaker imports from China and downturns in several large emerging economies.
Reflective of the global trends, Malaysia’s real imports grew at an average annual rate of 2.1 per cent in the 2012-2016 period while exports rose 1.3 per cent, considerably lower than the eight to nine per cent growth in imports and exports achieved in the pre-global crisis period.
Changes in level and structure of demand
A synchronised slowdown in the advanced and developing economies has been identified as one of the main causes of the trade slowdown. However, the drop in the output level could not fully account for the unprecedented collapse and subsequent slowdown in global trade.
Changes in the composition of demand, particularly the shift from exports and investment to consumption in large economies such as China, and the weak investment activities in the advanced economies have also been found to be playing a key role in explaining the “missing global trade”.
Investment activities have a higher trade component or “trade-intensive” in nature compared with consumption. A slowdown in investment leads to a stronger decline in trade flows of capital and intermediate goods compared. Another compositional change is the steady shift to consumption of services, which are less traded, as income increases in developing countries.
Changes in supply structure
On the production side, besides the rise in supply of lesstraded services, the slowdown in the fragmentation of the international production networks, the so-called global value chains (sometimes referred to as global supply chains), has been acknowledged as another important source contributing to the trade slowdown.
In addition to the slower trade in intermediate goods as global supply chains and production networks mature, there is also emerging evidence of a rise in temporary trade barriers erected by many countries to protect domestic industries although its contribution to the recent global trade slowdown is not very large.
Fortuitously, the initially feared rise in protectionism during the early part of the global recession did not materialise. Nevertheless, the recent rise in trade restrictions could impede the flow of intermediate goods during the recovery period as global growth strengthens. This is because of the importance of the decline in trade cost and frictions as a key impetus to the strong trade growth during the pre-crisis period.
Trade costs and frictions
The strong increase in global trade is associated with trade liberalisation pursued by many countries during the 1980s and 1990s and the entry of China into the World Trade Organisation in 2001. Empirical modelling of the trade costs associated with protectionist policies and non-tariff barriers shows that they can explain between 10 and 25 per cent of the global trade slowdown.
The recent strengthening of global output augurs well for a pick-up in global trade given that weak economic activity is found to explain three-quarters of the global trade slowdown since 2012. The strong expansion in Malaysian exports and imports this year is reflective of the recovery in global demand. Consequently, the short-term prognosis of Malaysia’s trade prospects remains favourable with positive spillovers to gross domestic product growth outlook.
The obvious question in the minds of policymakers and industry leaders is the strength and durability of the rebound in global economic activity. Given a better understanding of the causes of the global trade slowdown, an accurate assessment of the current global growth trajectory will require a good prediction of the changing patterns of demand, especially in the large economies like China as it shifts to a consumption-led economy.
Importantly, the large role of trade liberalisation and costs in explaining trade, and the positive feedback effects of trade on growth suggests that markets should be kept open and efforts to reduce trade costs and impediments will generate positive growth dividends.
Given a better understanding of the causes of the global trade slowdown, an accurate assessment of the current global growth trajectory will require a good prediction of the changing patterns of demand.