Lessons learnt from global trade slow­down

New Straits Times - - Business / News - DR YEAH KIM LENG The writer is the Pro­fes­sor of Eco­nom­ics at Sun­way Univer­sity Busi­ness School and Di­rec­tor of Eco­nomic Stud­ies Pro­gram at Jef­frey Cheah In­sti­tute on Southeast Asia (JCI) at Sun­way Univer­sity. He is also an ex­ter­nal mem­ber of Bank Ne­gara M

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.

Im­pli­ca­tions

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.

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