Ten reasons why global trade growth is slowing

The global financial crisis has had a serious impact on world economic growth. Compared with the growth rate of world gross domestic product (GDP), the growth rate of global trade in goods has been more affected. During the 2009 crisis, the actual growth rate of global trade in goods fell by 29.97 times that of GDP, and the nominal growth rate fell by 58.56 times that of GDP, so much so that the economics community called it the “Great Trade Collapse.” In the past two years, the growth rate of global trade in goods has remained lower than the growth rate of GDP. The current slowdown in trade growth is likely to be only a temporary phenomenon and may not be sustainable, and it is difficult to say that the relationship between trade growth and GDP growth has changed.
Top ten reasons for the slowdown in global trade in goods:
1. Demand factors. Due to the strong volatility of trade growth, short-term factors should first be considered when analyzing its growth or decline. In 2012, the world economic growth rate was 3.37%, in 2013 it was 3.28%, and in 2014 it is expected to grow 3.3%. At the same time, the world economic growth rate exceeded 4% in both 2010 and 2011. The global economic growth is slowing down, income growth is slow, and natural final demand is insufficient. Numerous research documents have emphasized the importance of demand factors. For example, Eaton et al. emphasized the important contribution of declining demand to trade disasters in their 2011 NBER working paper. This document uses the classic Eaton-Kortum model in international trade to conduct a numerical simulation analysis.
2. The driving effect of China’s accession to the World Trade Organization (WTO) on world trade has weakened. China’s accession to the WTO in 2001 was an important external driving force for the rapid growth of world trade before the global financial crisis. This not only caused China’s exports to grow rapidly, but also caused China’s imports to increase rapidly, thus driving the growth of trade throughout the world. In the past two years, China’s trade has begun to enter an era of single-digit growth, and its role in driving world trade has significantly weakened.
3. Background factors of the global value chain division of labor model. Existing research generally agrees that the global value chain division of labor model has flourished since the 1990s. An important feature of this division of labor model is that different production links of products are located in different countries. This division of labor model can often amplify the growth or decline of trade. For example, a 1-unit decline in the final demand for Chinese products in the United States will not only lead to a decline in China’s exports, but also a decline in China’s imports of intermediate goods, which will affect the import and export of countries in different production links, resulting in a decline in trade growth. The decline in GDP has become more severe. Of course, if GDP growth increases, trade growth will often increase even more. Of course, this assumes that global value chains are repaired. Trade growth recovered rapidly in the two years after the financial crisis, but then fell into a downturn. This may be because global value chains have not yet been fully repaired.
4. The global value chain has developed to a sufficiently deep level, with limited marginal deepening. This reason is the explanation provided by the WTO, that is, since the 1990s, the global value chain division of labor model has developed rapidly, and in the process, the trade growth rate has been relatively high. However, because the global value chain has now developed to a deep enough level that it is difficult to deepen it further, this driving force to increase trade growth no longer exists, resulting in the current sluggish trade. If this judgment is true, then sluggish trade growth will be a long-term phenomenon. We believe that the global value chain has indeed deepened to a certain extent. Although continued deepening has great potential, it requires deep-seated factors to promote it. Therefore, marginal deepening becomes more difficult. Generally speaking, the ratio of value-added exports to total value exports (abbreviated as VAXR) can be used to measure the degree of division of labor in each country’s global value chain. The larger the value, the lower the degree of division of labor; the lower the value, the higher the degree of division of labor. . On average, the VAXR of the world as a whole is slightly greater than 0.6. The economy with the lowest VAXR in the world is only 0.4, and it is a small economy. Therefore, it is indeed difficult to continue to deepen the global value chain in the future.
5. Production and trade structure. When understanding the difference in GDP and trade in goods growth during the crisis, another important factor that cannot be ignored is the difference in production and trade structures. We analyze only trade in goods in this article, excluding trade in services, as is common practice in the existing literature focusing on trade performance during crises. Then, it is obvious that GDP, as a production aspect, includes not only the production of goods, but also the production of services, and the proportion of service trade in total trade is limited, especially for the vast number of developing countries. Durable consumer goods in goods trade are generally vulnerable to crisis shocks, that is, when a crisis strikes, consumers’ consumption of necessities drops less, but their consumption of durable goods is significantly reduced. However, for GDP, commodity production accounts for a part, and the stability of the service industry can smooth out the fluctuations in GDP growth.
6. Price effect. After the financial crisis, commodity prices fluctuated significantly. The commodity price index in current US dollars reached a peak level of 298.6 in 2008 and fell to a bottom of 186 at the end of December of the same year. Due to the stimulation of various countries’ fiscal and monetary policies, commodity prices rebounded in 2010 and 2011, and then began to fall again in 2012 and 2013. This will lead to a fall in trade volumes measured in monetary units. In addition, during the crisis, it is often difficult to export. In order to promote exports, exporters often use price competition to compete, resulting in the price of manufactured goods falling to varying degrees. Since 2012, a strong U.S. dollar will also lead to a decline in U.S. dollar-denominated stocks.The growth rate of transaction volume was affected. In the past two years, the U.S. dollar index has shown an overall upward trend.
7. Financing is blocked. During the financial crisis, the financial industry was first affected, resulting in tight trade credit, difficulty in corporate financing, and rising corporate financing costs. Even after the crisis, recovery will be difficult in the short term. Affected by this, export and import companies often find it difficult to successfully obtain the funds needed for production or import, resulting in both production-side exports and demand-side imports being affected.
8. Trade protection. During the crisis, the degree of trade protection is higher than in normal times, which will also affect the growth rate of global trade. According to existing research, trade protection measures including anti-dumping and countervailing measures often have a significant impact on the number of types of exports by enterprises and the number of existing types of exports. The level of trade protection has not declined in the past two years, and the international environment faced by exports has not improved, which has affected trade growth.
9. The substitution relationship between trade and investment. In times of crisis when trade protection is severe, companies from various countries often turn to overseas investment to supply the local market, thereby reducing exports. This substitution relationship is also a factor that hinders trade.
10. The final reason for the slowdown in trade growth is the obstruction of trade liberalization. After the Doha Round negotiations were launched, they have not been completed, and there has been no significant progress in the world trade liberalization process. Against this background, developed countries led by the United States have begun to launch the process of regional economic integration. However, the process of regional economic integration has not made significant progress in the past two years. As a result, world trade has been lacking the important engine of trade liberalization. When world economic growth was sluggish after the financial crisis, the negative impact of blocked trade liberalization on trade growth became apparent.
To sum up, the slowdown in global trade growth occurred in 2012 and 2013, and is unlikely to continue. After 2015, world trade growth will be higher than economic growth again. The top ten reasons proposed in this article have combined to contribute to the trade downturn in the past two years.