Keeping the Wheels of Trade in Motion

IMF News, September 26, 2016

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Published: September 26, 2016

Key findings on trade slowdown

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.
Weak economic activity, particularly investment, accounts for about three-fourths of the dramatic slowdown in the volume of trade since 2012 compared with 2003–07.
Beyond weaker growth, other factors collectively shave up to 1¾ percentage points off global real import growth each year since 2012.
Among these additional 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 of the residual slowdown.
The slowdown in the relocation of production across countries is also putting the brakes on trade, though it is difficult to determine whether opportunities for further supply-chain dispersion have been exhausted or hampered by trade-distorting policies.

Study basis and scope

The study is published in the October 2016 World Economic Outlook.
It uses a number of complementary approaches and a new detailed data set of trade volumes by product type.
A model-based estimate corroborates empirical analysis that up to three-fourths of the shortfall in real trade growth since 2012 can be traced to globally weaker economic growth, notably subdued investment.

Outlook for global trade

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 will most likely persist.
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, when investment growth in China and many other emerging markets was unusually high, trade costs were falling, and global value chains were rapidly developing.

Policy recommendations — greasing the wheels

Address constraints to growth to boost global activity and grease the wheels of international commerce, creating a virtuous cycle as trade stimulates further gains in productivity and growth across borders.
Resist all forms of protectionism; trade policies (for example, free trade agreements) remain relevant and should be used to support trade.
Dismantle remaining barriers to provide support for trade and potentially jumpstart a new round of global supply-chain development.
Substantial scope exists to further reduce trade costs, including:
- 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 focus on areas relevant to the contemporary global economy, such as regulatory cooperation, reducing barriers to trade in services, and taking advantage of complementarities between cross-border investment and trade.

Fair(er) trade and adjustment policies

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

Authors: 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.