The world trade comeback

In late 2014, a DHL study on Global Connectedness predicted the globalisation movement to slowly creep back into the limelight after a decade of economic hibernation. Half a year on, a follow-up report by ING has now confirmed the DHL prognosis – but with a twist. According to ING’s Head of International Trade Research, Raoul Leering, a rebound of world trade is only likely if a range of trade negotiations, infrastructure investments and continued cost cutting efforts are successful.

In the report – aptly named The World Trade Comeback – Leering agrees with DHL in suggesting that the current slowdown in global trading would  notnecessarily mean the end of globalisation per se. But he also indicates that it is unlikely for growth to return to the elevated levels experienced in the 15 years prior to the collapse.

“We believe part of this slowdown is temporary and that trade growth will return to outpace GDP growth, albeit at lower levels than in the 15 years prior to the financial crisis of 2008,” he says. “There is still plenty of potential for further integration of big emerging markets, such as China, India and the Philippines into the global economy. The big bang that happened in the 1990s and 2000s isn’t going to be repeated, but economic integration is far from over.”

Leering’s cautiously optimistic view is largely based on the theory that economic and market phenomena occur in cycles, with historic data indicating that the next upswing might not be far off: Historically, the average annual growth rate of world trade in volume terms has been 5.7 per cent since 1970 and only 3.3 per cent since 2012 – outgrowing GDP growth by a ratio of 1.9, almost 2.0, during the 15 years prior to the financial crisis. While the figure is currently hovering around the 1.0 mark – the same as during the 1980-1982 recession – Leering is confident that “normal cyclical effects” will see it rise to 1.2 by the end of 2016.

According to a 1999 study, a one per cent increase in the share of trade to GDP raises per capita income somewhere between 0.5 and two per cent – explaining just how important the measure is to evaluate the state of the global economy and why Leering is so fixated on finding out when and how it will bounce back. He argues that examining the historical development of trade relative to world GDP could also help us understand whether the current slowdown in trade is just a typical (post) crisis development or represents a real structural break.

Starting his search in Europe, he argues the ratio could be lifted soon if specific European factors fall into place. “The long economic downturn in the EU has pushed the growth of world trade down disproportionately …  This implies that the current increase in European growth rates will make world trade recover disproportionately too,” he explains. Leering and his team expect the European economy to drive the ratio up by 0.1 percentage point to 1.3 before the end of 2016 – but for the ratio to come close to its long term average of 1.7, they say more is needed than this cyclical push, especially on the regulatory front.

According to ING, what could tip the scales toward a fully-fledged recovery is a successful implementation of the much talked-about Bali agreement on lowering customs procedures around the globe. Although negotiations for the agreement have been on hold for years, they are currently in the process of parliamentary approval by the Word Trade Organisation (WTO).

Leering says that the implementation of the Bali agreement would ultimately lift world trade by 4.1 per cent and world GDP by 1.1 per cent – in turn pushing the trade/GDP ratio by 0.14 percentage points annually between 2016 and 2020. “The effect of this 0.14 per year brings the trade growth to GDP growth ratio close to 1.5 during the 2016-2020 implementation period, as long as the world economy is in a cyclical upturn – otherwise the cyclical influence on the ratio will start working in the opposite direction again,” he explains.

And, there’s more regulation pending that could help globalisation bounce back. ING found that if negotiations on the Transatlantic and Pacific trade agreements (TTIP and TPP) deliver results that are acceptable for European, American and Asian governments and parliaments, an upward effect on world trade in the medium to long term will appear as well. “This will push the ratio up, but how much and when is unclear because it is unknown when negotiations will be finished and what the outcome will be,” says Leering.

With the offshoring trend likely to continue for the foreseeable future and production moving to developing economies to be close to demand, Leering says a second obstacle could lie in infrastructure development and logistics. ING estimates that doubling the length of paved roads in key markets alone could boost trade by 13 per cent – a pathway already chosen by India and Korea, which have both invested heavily in local road networks. Substantial improvements in infrastructure have also been made in Turkey, Indonesia, Romania and Russia, while South Africa, Thailand and Brazil are currently lagging behind, says Leering.

On the transport side, Leering says on-going innovation in the marine container market would further improve costs and boost trade. “Innovations have lowered trade costs spectacularly in the past. For example, the invention of the telegraph, telephone, jet engines, containerisation and the ICT revolution, all had a huge impact on world trade,” he explains. “Currently work is being done to further reduce the transport costs of trade. For example, making containers much lighter using composite material can be a new stimulus for world trade.”

While ING found that it is not likely that the current ratio of world trade to GDP will rise above pre-financial crisis levels again, it says that it has all the potential to go up again and improve welfare across the world – but only if current regulatory and logistical challenges are overcome and opportunities for improvement used. Until then, the economic waiting game is likely to continue.

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