Global trade stuck in the slow lane since GFC

WORLD trade, stuck in the slow lane since the global financial crisis, is likely to stay that way, a World Bank study suggests.

Trade trend

WORLD trade has now been stuck in the slow lane since the global financial crisis and new analysis by the World Bank suggests it is likely to stay that way.

Australia has so far defied the slowdown, but the collapse in commodity prices partly reflects rapid growth in Australia’s exports hitting slow demand in the rest of the world.

World Bank research included in its revised global economic outlook last week shows the downturn in world trade growth is the result of both weak demand and longer term structural changes in the global economy.

Before the financial crisis, global trade rose at an average annual rate of 7 per cent a year, and was part of the dynamic supporting rapid economic growth, particularly in the emerging world. Trade volumes doubled over a decade. Trade collapsed in 2009 as the crisis hit and then recovered ground in 2010, but since then has averaged growth of only 3.4 per cent a year.

Australia has been an outlier, achieving growth in export volumes averaging 6.1 per cent for the past three years as major resource projects come on stream. This growth will run for the next few years as remaining iron ore and coal expansions and the seven LNG projects are completed.

The World Bank estimates that global GDP is still about 4.5 per cent below what it would have been had pre-crisis growth-rates been maintained. The weakness in demand has been greatest in the high-income countries.

Despite its better growth over the past few years, the US economy is still 13 per cent smaller than if historic growth rates had been maintained, while the European economy is 8 per cent smaller. Import volumes into both the US and Europe are more than 20 per cent below their long-term trend.

The World Bank says the depressing effect of a crisis on trade typically lasts for five or more years, so it is not surprising that, after such a serious downturn, trade is still suffering. However, its analysis suggests that short-term demand issues are responsible for only a third of the downturn in world trade.

Trade has become much less responsive to changes in growth rates, and this change occurred well before the financial crisis. From 1986 to 2000, a 1 per cent increase in world GDP was associated with a 2.2 per cent increase in world trade. In the 13 years since then, a percentage point increase in GDP has delivered only a 1.3 per cent rise in world trade. That was also the responsiveness or “elasticity” of trade to growth in the decade before the mid 1980s.

The World Bank says the growth in trade during the 90s was partly due to the international fragmentation of manufacturing production, with the advent of container shipping, just-in-time manufacturing techniques and advances in global communications enabling manufacturing to be conducted across different countries. This process has now come to an end.

This is seen most clearly in the growing self-sufficiency of China. The share of its exports provided by imported components has dropped from 60 per cent in the mid-90s to 30 per cent now. The US was a major source of components for the emerging world manufacturers and was a market for the completed products, but its imports of manufactures have been stable now for a decade, after doubling through the 90s.

There have also been shifts in the composition of demand. Investment has been very weak while consumption has been uneven. Government spending has generally been more stable. Investment is the most import-intensive source of demand while government spending is the least. The World Bank says trade finance has also become more difficult since the financial crisis. Financial institutions, facing pressure to deleverage, have had to cut back on credit growth in order to boost their liquid assets.

While the quantitative easing policies of central banks have helped, credit availability has been affected by the higher capital requirements under the banking reforms. The World Bank cites a survey showing that 71 per cent of banks said that higher capital requirements were crimping trade finance.

Another factor has been the increase in protectionism. Although the G20 members vowed in 2008 to resist protectionist responses to the crisis, the World Bank says there have now been 1185 protectionist measures imposed by the G20 since the crisis. Although countries had promised that any measures would be temporary, only 250 of the measures had been removed by May 2014.

The World Trade Organisation says these measures have only affected about 4.1 per cent of world trade, so cannot be the source of the slowdown. However, the World Bank says: “The slower pace of liberalisation in the 2000s compared to the 1990s may have contributed to the lower growth in trade.”

The slowdown in the emerging world has also been dramatic. China’s imports grew by only 0.4 per cent last year, while its total trade rose by just 3.4 per cent against a target of 7.5 per cent. For the moment, China’s imports of iron ore remain strong, with purchases in December 18.4 per cent ahead of the previous year. However, this may simply reflect restocking at low prices ahead of the Chinese New Year shutdown.

With China’s steel industry burdened by overcapacity, demand is expected to be weaker over the year ahead.

To the extent that Australian resource companies have lower production costs than competitors, they can continue to increase exports more rapidly than underlying demand by accepting continuing falls in received prices to win market share. There is no other way that Australia’s rapid export growth can be accommodated.

The World Bank says that eventually demand will lift, but there is unlikely to be a substantial recovery in global trade in the short or medium term. If the responsiveness of trade to GDP of the past decade persists, a return to normal world growth would only lift global trade growth by about 1 percentage point to about 5 per cent, considerably slower than the pre-crisis rate.