For decades, whatever else happened, you could rely on trade soaring, driving economic development around the world. Then along came the financial crisis and trade growth faltered. In the past six years, volumes of trade have grown by just 5 per cent, while nominal GDP has shot up by more than 10 per cent.
Some see the slow recovery as a sign that global trade has been set back for good. Knocked off course by the crisis, trade has lost its momentum from globalisation, abundant trade finance and rising commodity prices, or so the argument goes.
We disagree. Whilst we’re unlikely to see a repeat of the golden age in the 1990s, when trade boomed as markets opened up around the world, there is much still to drive trade forward.
“Manufacturing, a crucial driver of trade, is coming out of the doldrums”
Historically, the volume of trade has always grown much faster than GDP – by a ratio of 1.4 since the 1960s – and we believe this long-term trend will be restored.
Much of the collapse in trade seven years ago was driven by a combination of cyclical factors that are now beginning to reverse. Growth in developed countries is picking up, while manufacturing, a crucial driver of trade, is coming out of the doldrums. Even the euro zone, mired for so long in recession, is expected to see growth of 1.3 per cent this year.
Trade is benefiting from improvements in technology
Trade protectionism rose in the wake of the crisis, as governments took steps to protect their economies from the impact. But fears that it’s getting worse are not borne out by the facts. More free trade agreements – multilateral as well as bilateral – are now being negotiated which will help bolster trade. And trade will benefit from improvements in technology, such as the proliferation of fast broadband and internet telephony.
We’re also beginning to see more trade finance becoming available. Supply of this vital fuel for trade was hit as banks (particularly European) withdrew from lending in the wake of the crisis, but increasingly the shortfall is being offset by international banks and banks from other regions, such as Asia.
However, while global trade is set to rise again, don’t expect it to look anything like it used to. Since the early 1990s, the nature of trade has changed dramatically and, if anything, this transformation has only been accelerated by the crisis.
If you exclude intra-EU trade, emerging markets now have a bigger share of world trade than developed ones, at 52.3 per cent. And trade between emerging economies – often referred to as South-South trade – has grown rapidly at the expense of trade between developed markets.
Goods are increasingly ‘made in the world’
Trade is becoming increasingly ‘unbundled’, as countries no longer trade in goods so much as in ‘tasks’, such as design or assembly. And goods are increasingly ‘made in the world’, as design, part production and assembly take place across multiple countries. Underscoring this trend, the import content of exports has doubled to 40 per cent since the 1990s.
Meanwhile, trade in services is expanding faster than trade in goods, with some estimates now putting services at as much as 40 per cent of total trade. Countries such as India, Vietnam and even the US are focusing on services exports to boost economic growth, particularly IT, finance and insurance.
“The world’s fastest-growing trade routes are likely to be those with a leg in Asia”
Provided global growth continues to improve, and trade barriers fall further, the World Trade Organisation estimates that global trade could quadruple from 2011 levels by 2035. And, within that, South-South trade would balloon to 43 per cent of world trade, more than twice the level of today, with Asia at its powerful centre.
In the decades to come, the world’s fastest-growing trade routes are likely to be those with a leg in Asia, just like the fastest-growing corridors in the last decade have been Asia-Middle East and North Africa, Asia-Latin America and Asia-Africa. And China will likely cement its position as the mega-trader of this century. Already, Chinese exports account for 11.5 per cent of the global total, up from a mere 1.6 per cent in 1990.
Reasons for optimism about global trade
As China and other large emerging markets become bigger, they will become more open and trade more with the rest of the world, and we will see more ‘horizontal’ trade amongst emerging markets, where countries at similar levels of development trade both finished and intermediate goods with each other. This contrasts sharply with the traditional understanding of trade, whereby countries exported differentiated goods to one another based on comparative advantage.
Much of the current scepticism about the future of global trade stems from a failure to appreciate the fundamental shifts in trade that have been happening in the past two decades. Allowing for these, we see compelling reasons to be optimistic about global trade, now and in the long term.
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