Cyclical or Structural Change? World Trade Growing Less Rapidly than Before the Crisis

With six to seven percent annually, world trade growth outpaced growth of the global economy in the past. Today, growth in world trade lags far behind the historical trend. According to the International Monetary Fund (IMF), world trade grew by just 2.8 percent in 2015, with 3.1 percent expected for 2016. Some of the reasons for this are cyclical in nature, but the structure of the global economy has also changed.

Falling growth rates in world trade

Growth rates for global GDP and world trade (%, year on year)

At present, the growth of world trade is far below the historical trend of six to seven percent per year. According to the International Monetary Fund (IMF), world trade increased by 2.8 percent in 2015. In 2016, just 3.1 percent are expected. During the decades around the millennium (1988 to 2007) world trade averaged growth rates of 7.0 percent, about double the rate for global GDP (3.1 percent). The ratio between the two, the “income elasticity of world trade”, has fallen significantly over recent years. According to the German Bundesbank, the long-term global trend for income elasticity was still about 1.9 during the period 1980 to 2007; in other words, world trade grew almost twice as fast as the global economy. Today the figure is about 1.3.

Different Causes

The new trend has various roots. Recession in the EU affected world trade more strongly than global GDP, because the inclusion of trade between individual EU member states (intra-EU trade) gives EU trade disproportionate weight in the global statistics. For that reason the negative influence of the euro crisis on world trade was stronger than its effect on global GDP. And the sluggish recovery of the Eurozone means that the EU’s external trade can do little to stimulate world trade.

Changes in the structure of the global economy also play an important role, however. Trade heavyweights like the United States and China have in recent years, according to the IMF’s World Investment Outlook, increasingly sourced their raw materials and intermediates domestically, for example through stronger oil production in the United States, rather than importing them. Altogether, foreign markets are increasingly supplied by local production facilities.

Another cause of sluggishness in growth in world trade lies in a slowing of liberalisation and a creeping tendency towards protectionism. For example, China’s accession to the WTO in 2001 gave a real boost to liberalisation in the global economy. Considerably more new free trade agreements were signed per year globally between 2000 and 2010 than between 2010 and 2014. In recent years world trade has also suffered the effects of rising tariffs and other trade barriers. Since 2008 the G20 countries alone have adopted 1,441 such non-tariff trade barriers, of which only 354 had been withdrawn again as of October 2015.

Another factor behind the lower income elasticity of world trade could be a normalisation of the global development that followed the inclusion of emerging economies in world trade (for example through China’s WTO accession in 2001).

Finally, the global economy faces a series of political risks that hamper trade. While the territorial disputes between China and Japan have cooled, conflicts in Europe, the Middle East, and North Africa are still in full swing.

Trade Policy Action Is Required

None of the outlined developments can alone fully explain the relative weakening of the dynamism of world trade. Most probably it is an interaction of many factors. What is certain is that trade policy must adopt suitable measures to continue strengthening world trade. These include further trade liberalisations in the WTO framework, the conclusion of trade agreements like TTIP, and agreements against protectionism in international forums like the G20. For world trade is an important pillar of growing global prosperity.