International trade helped the global economy tide over rough spots
over two decades before the financial crisis, when it grew nearly
twice as fast as economic output, but this engine is running out of
fuel.
That is bad news for officials taking part in discussions at the
International Monetary Fund and World Bank meetings this week,
focused on preventing what International Monetary Fund chief
Christine Lagarde warns could be a long spell of sub-par performance
for the global economy.
The impetus from China and Russia opening their doors and the
emergence of global supply chains, linking factories in emerging
markets with rich consumers in the developed world, has largely run
its course, economists say.
"It's that particular engine which seems to have exhausted its
propulsive energy for now," said World Bank trade specialist Aaditya
Mattoo.
The McKinsey Global Institute calculates trade and cross-border
financial flows contribute up to a quarter of global growth, leaving
policymakers with a gaping hole to fill if trade shifts into a lower
gear.
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As the IMF cut its global growth outlook, it also forecast annual
trade growth to average just 4.2 percent in the 10 years starting in
2016, compared to 6.7 percent in the decade leading up to the
2008-2009 financial crisis.
One reason for that downgrade is obvious enough: it is hard to
replicate the effect of an economy of China's size tearing down
trade barriers.
Add to that slower growth in other emerging markets as they become
richer and have less catching up to do, a smaller wage gap between
developed and developing nations and a renewed leaning to make
inputs for final products close to home.
NEW SPARK NEEDED
RBC Global Asset Management chief economist Eric Lascelles predicts
trade's contribution to growth will be half a percentage point lower
than in the previous two decades - half of that because of weak
global demand, trade barriers and geopolitical tensions and half
reflecting permanent changes in trade dynamics.
"We could expect some of the lost trade to come back but
realistically a lot of it is probably gone forever and we may
actually be in an area of diminished globalization, primarily via
lower trade flows but perhaps also via less on the migration front
and less on the financial flows front," he said.
The pressure is on policymakers to regain as much momentum as
possible through far-reaching regional and global pacts and
standards under the aegis of the World Trade Organization.
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"We have been living too much off past trade liberalization," WTO
Director-General Roberto Azevedo told the IMF's steering committee,
urging policymakers to support a global pact to cut customs red
tape, now stalled by opposition from India.
Economists estimate that those changes, when fully implemented,
could boost global output by $1 trillion per year, equivalent to a
1.3 percent boost to the world economy.
That's roughly twice as much as the combined impact of major trade
deals being negotiated between the United States and Europe and
another between 12 Pacific Rim countries, including the United
States, Japan, Canada and Australia.
Economist Ed Gresser, from Washington-based think tank Progressive
Economy, said services trade could expand as technological
innovations made it easier to provide services like education and
healthcare across borders.
In the United States alone, internet-friendly services such as
communications and financial services had grown to make up 11.7
percent of exports by 2012, from 7.6 percent in 2000.
"The natural path of that should be to bring services up, in the
same way that manufacturing trade grew relative to resources and
agriculture in the second half of the 20th century," he said.
HSBC global chief economist Stephen King said there was also
potential to increase trade among countries in Latin America, Asia,
the Middle East and Africa, which had not been fully captured by
recent waves of trade growth.
But he said an increase in so-called south-to-south trade and
increased demand for services in developing countries would fall
short of the 0.5 to 1.0 percentage point boost trade had given to
global growth, on average, since the 1950s.
"Once you have opened up all those opportunities, you can't keep
opening them up because there are no more opportunities to open," he
said.
(Editing by Tomasz Janowski)
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