Boosting growth would help grease the wheels of international commerce, with trade stimulating further gains in productivity and growth across borders (photo: Ilya Naymushin/Reuters/Newscom)

Keeping the Wheels of Trade in Motion

September 26, 2016

  • Weak economic activity, particularly investment, accounts for about three-fourths of the dramatic slowdown in the volume of trade since 2012
  • Stalled trade liberalization, recent spike in protectionism, and slower dispersion of production across borders also holding back trade but to a lesser extent
  • Trade volumes are likely to remain subdued unless growth and investment pick up; further trade reforms can also help

The slowdown in trade growth since 2012 is largely because of weak growth, but also fewer trade deals and a recent uptick in protectionism, a new IMF study finds. Further trade reforms, together with measures to help those who stand to lose, would help reinvigorate trade, which helps spread technology and know-how.

Since 2012, growth in the volume of world trade in goods and services has been tepid at around 3 percent, less than half the rate during the preceding three decades. World trade has barely kept pace with world GDP and the slowdown has been widespread (see panel chart).

The study, published in the October 2016 World Economic Outlook, explores the reasons for the weakness in global trade using a number of complementary approaches and a new detailed data set of trade volumes by product type.

The growth cogs in the trade machine

Slow trade is mostly a symptom of the sluggish economic recovery, the study finds. Empirical analysis suggests that up to three-fourths of the shortfall in real trade growth since 2012 compared with 2003–07 can be traced to globally weaker economic growth, notably subdued investment. A model-based estimate delivers a similar result.

Beyond changes in the level and composition of economic growth, other factors are weighing on trade growth, collectively shaving up to 1¾ percentage points off global real import growth each year since 2012. Among these factors, trade costs—caused in part by protectionist policies—and the extent to which countries are involved in global supply chains accounted for almost half.

Even though the contribution of trade costs to the trade slowdown has been limited relative to weak economic activity so far, the dearth of new global policy initiatives to reduce these costs, along with the gradual rise of nontariff barriers since the global financial crisis, could pose further risks to trade. The apparent slowdown in the relocation of production across countries is also putting the brakes on trade, though it is difficult to determine whether existing opportunities to exploit supply chains have been exhausted, or whether they have been hampered by trade-distorting policies.

What does this mean for the outlook for global trade? The study suggests that trade and economic growth are closely linked: faster growth typically accompanies greater trade. With only a limited pickup in global activity on the cards for the next five years, slow global trade growth, therefore, will most likely persist.

And even as the global economy eventually gathers momentum, trade is unlikely to post the sorts of growth rates seen prior to the global financial crisis.  At that time, investment growth in China and many other emerging markets was unusually high, trade costs were falling due to policy cooperation and technological advances, and global value chains were rapidly developing.

Greasing the wheels

Addressing constraints to growth should lie at the heart of the policy response. This would not only boost overall global activity but also help grease the wheels of international commerce, creating a virtuous cycle as trade stimulates further gains in productivity and growth across borders. For example, firms can get access to better quality inputs through trade, as well as learn about new technologies and processes from foreign markets.

However, with the weak economic outlook already weighing on trade, trade policies (for example, free trade agreements) themselves remain relevant, and all forms of protectionism should be resisted. At the same time, dismantling remaining barriers would provide much-needed support for trade, possibly by jumpstarting a new round of global supply-chain development.

There is also substantial scope to further reduce trade costs. These include:

  • cutting tariffs where they remain elevated;

  • ratifying and fully implementing commitments made under the Trade Facilitation Agreement; and

  • establishing a way forward for the post-Doha trade agenda

Future trade reforms should also focus on the area’s most relevant to the contemporary global economy, such as regulatory cooperation, reducing barriers to trade in services, and taking advantage of the complementarities between cross-border investment and trade.

Fair(er) trade for all

To preserve the benefits of trade integration, policymakers should address the concerns of workers and industries that have trouble adjusting to greater overseas competition and take steps to ease their transition. Such policies include sufficiently broad social safety nets, as well programs to support retraining, skill building, and occupational and geographic mobility.

The authors of this chapter are Aqib Aslam, Emine Boz, Eugenio Cerutti, Marcos Poplawski-Ribeiro, and Petia Topalova, with support from Ava Yeabin Hong, Hao Jiang, Evgenia Pugacheva, Rachel Szymanski, and Hong Yang. 






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