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<b>Abheek Barua & Bidisha Ganguly:</b> Has global trade lost its mojo?

If indeed it has, that would have major ramifications for economic recovery

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Abheek BaruaBidisha Ganguly
Last Updated : Jun 27 2016 | 4:11 PM IST
When market economists get caught up in small ups and downs in data releases, they tend to miss the big picture. One major trend that has not received the attention it should is the significant decline in the value of global trade in 2015 for the first time since the global financial crisis. The question to answer then is whether this is a cyclical phenomenon - slow global growth is likely to mean lower imports and exports or a change in trend. The latter would indeed be worrying, as expansion in trade has been an important driver of global productivity gains. To quote noted economist Gavyn Davies, "the expansion of global trade seems to have lost its mojo".

Let's look at some numbers. According to the International Monetary Fund, world exports in goods and services (measured in US dollars) declined by 10.9 per cent while exports of goods alone declined by 12.5 per cent in 2015. The World Trade Organization (WTO) database shows a marked moderation in the annual growth in world trade volumes, which has fallen steadily from 4.2 per cent in the fourth quarter of 2014 to one per cent in the same quarter of 2015.

This decline is somewhat conveniently attributed to three factors: the rise in the US dollar (that makes values in other currencies translate to less in US dollars), the fall in commodity prices and the replacement of outsourcing with domestic production, particularly by firms based in China. A recent report from the think tank Centre for Economic Policy Research ("The Tide Turns? Trade, Protectionism and Slowing Global Growth" by Simon J Evenett and Johannes Fritz), rejects the interpretation that these are the only factors affecting global trade.

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According to them, world export volumes are currently two per cent below their peak, breaking the upward trend apparent since the global economy emerged from the crisis in 2010. Global trade is not just slowing down, it is falling, too. And this cannot be explained by either commodity prices or exchange rates. After decomposing the recent fall in trade values, the authors find that while the collapse in commodity trade stands out, trade in other categories including intermediate, capital and consumer goods also stand at 10 to 20 per cent off their peaks in 2014.

Another hypothesis is that the fall in global trade is actually the result of improved efficiency - companies are reconfiguring their supply chains, buying more of local components, keeping their inventories tight. The report takes a step forward and segregates manufactured products into two categories: ones where parts and components are included within the category and others that are essentially final goods. The contraction in trade involving parts and components is substantially less than the decline in final goods trade. This, the authors believe, casts doubt on the importance of supply chain reconfiguration as a critical explanation of the fall in global trade.

Instead, they find that the products whose exports have fallen are the very same products where G-20 countries have imposed trade restrictions since the beginning of 2014. They argue there has been a rise in the worldwide spread of protectionist measures, with a variety of measures being used to protect domestic businesses. In addition to tariff hikes, these include measures such as subsidies and bailouts, localisation requirements as well as measures against import surges.

But this key change in the global trade environment seems to have got short shrift. Leaders at the recent G-7 Summit in Japan focused more on the need to avoid competitive currency devaluations rather than issues of trade distortions. If indeed global trade has lost its "mojo", it would have major ramifications for economic recovery. The agenda for freer trade has to be revived, multilateral institutions like the WTO would have to be made to rise from the ashes and the short-term benefits of both blocking imports and creating cosy trade blocs will perhaps have to be jettisoned for the medium-term gains of a freer global environment for trade.
Abheek Barua and Bidisha Ganguly are chief economists at HDFC Bank and CII, respectively

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Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper

First Published: Jun 05 2016 | 9:49 PM IST

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