Slowing global trade, the 'new normal'
|Date:||30 March 2017|
Global trade is best understood by imagining a big shipping port like Rotterdam. Huge ships come and go, loading and unloading hundreds of metal shipping containers. Inside those containers are products from all over the world.
Over the past decades, the pace at which these products have been moved around the world has been growing steadily. A German car company, for example, might order seatbelts made in Taiwan, light bulbs made in Vietnam, and engine parts from Britain, and have it all assembled in a factory in Austria.
This is globalization: each country or company specializing in the specific task it does best. As a result: the consumer benefits from lower prices and a higher variety of goods.
Our research, however, indicates that the trend of supply chains becoming ever more complex may have turned a corner. And perhaps surprisingly: we do not need to worry about it.
For roughly 15 years, trade – the volume and pace of products coming and going -- grew faster than the global economy as a whole
My research together with Bart Los and Gaaitzen de Vries and Robert Stehrer, found there was a turning point in 2011. That was the point at which trade began to slow down compared to world economic growth.
This trend has concerned economists, who thought it might indicate ill health in the world economy. But the reasons why trade is slowing indicate we may not need to worry.
To discover what was causing the trend, we broke down the trade figures to see what aspects of trade were growing, and which were slowing.
We developed a new methodology to measure the trade intensity of a product, which is a key concept here. A car is trade intensive as its production requires parts to be shipped from all over the world. Netflix on the other hand is not a physical product and its production has much less “trade intensity”.
Our analysis revealed two factors underpinned global trade growth in the past. Firstly, consumers were buying more products that were trade intensive, like cars; and secondly the products themselves had increasingly complex and more trade intensive supply chains. Companies were sourcing the component parts that went into a single product from an increasingly long list of different countries.
In 2011, these trends stopped.
China was a key driver of this, as its citizens began to become more hungry for services, rather than consumer goods.
China was also responsible for slowing of trade growth in another way. Its industry became more self-sufficient. Rather than buying in parts from different countries around the world, it produced more and more of the parts for consumer goods itself. International trade was cut out of the picture.
Based on what we have discovered, can we know what will happen to global trade in the future?
According to our research, there is still a lot of room for production supply lines to fragment and become more complex. But given the political currents against globalization, such as Britain voting to leave the European Union, and the protectionist declarations of US President Donald Trump, it seems that this may not happen in the near future.
Our conclusion is that the slowdown in global trade is the new normal. What effect this might have on the global economy remains to be seen.