Why Global Trade Is Struggling

A lot of people for a long time have been predicting it, and a lot of people are eager for it to come, or at least think they are. As the data continues to worsen, it’s only a matter of time till the mainstream media picks up on the story.

The day has come!  It’s the end of globalization!

By the most common definition of recession, global merchandise trade is already in one. Volumes of internationally traded goods shrank by 0.5% in the second quarter, after shrinking 1.5% in the first, according to the Dutch government’s World Trade Monitor. Those are equivalent to 2.1% and 5.9% annualized paces.

This hardly compares to the fall and winter of 2008-2009, when global trade in goods shrank by 7.2% and another 10.9% in two consecutive quarters. Volumes of traded goods were still up by 1.1% in the second quarter of 2015 versus the second quarter of 2014.

Also, these numbers don’t include trade in services. International business process outsourcing is still booming, and international tourism is doing fine.

Still, there’s no doubt global trade is struggling. Judging from the recent drops in commodities prices, nobody is expecting trade growth to bounce back anytime soon, not even to the 2.6% pace it averaged in 2012 to 2014. A return to the long-run average of 7% annual global trade growth that prevailed until 2007 seems more far-fetched than ever.

Emerging Markets In Crisis

This is far from the end of globalization. But it is a crisis, and one that could last a while.

The problem is in emerging markets, which had been leading global trade growth since the 2008-2009 crisis. Imports by low and middle-income countries accounted for 71% of the growth of global merchandise trade between 2008 and 2013, though even by the end of that period their imports were only 31% of global merchandise trade. Those figures are by dollar value and are calculated from World Bank data.
 
Trade among emerging markets was especially strong. Imports by low and middle-income countries from other low and middle-income countries accounted for a third of global merchandise trade growth from 2008 to 2013, even though by the end of that period they still accounted for only a tenth of global merchandise trade.

When countries punch so far over their weight, they tend to tire quickly. Put another way, the catch-up process for emerging markets is inevitably cyclical.

Above all, trade growth in 2008-2013 was driven by a frenetic pace of building in China. Housing, retail space, offices, industrial plants and infrastructure were all built as quickly as possible, financed from foreign investment and booming exports. That drove up prices of imported raw materials, especially oil and ores, but China was able to keep up by continually boosting its exports, especially to its raw materials suppliers.

That growth model has been unraveling since 2014. One reason was that Chinese households became reluctant to invest further in housing. I don’t have good data, but based on anecdotal reports, it appears that a large portion of middle- and upper-class Chinese families already hold apartments for investment, and a large portion of those are empty. As apartment prices in most cities have stopped rising, owners of empty apartments are taking losses as their apartments age and depreciate, which is a powerful warning to potential buyers.

Another reason global trade is struggling is the fracking boom in the United States, which by driving down the price of oil hit the incomes of the raw-materials producers that had been most rapidly increasing their imports from China. Steel and iron ore prices crashed as construction industries contracted in Russia, the Middle East and other raw materials exporters, adding to the slow-down of construction growth in China.

Emerging market currencies devalued, even those of materials-importing manufacturers. The dollar value of emerging markets imports didn’t grow at all in 2014, and both values and volumes have been dropping this year.

The next chart is of merchandise trade volumes, again from the World Trade Monitor. It shows how emerging markets, the red line, led global trade growth for many years, and how sharply their demand for imports has recently collapsed.

A Developed-Economy Recovery Isn’t Enough

 

Meanwhile, the United States has reverted to its former status as the biggest driver of global trade demand, at least this year. Import volumes were up 7.4% year-on-year in the first half, according to the Dutch data. A much-touted “re-shoring” trend has been overwhelmed: US manufacturing employment has been flat this year after a modest partial recovery in 2010-2014.

But the US demand growth looks like a one-off that stems directly from the fracking boom. As oil prices and oil import volumes have dropped, the dollar has appreciated, and Americans have reallocated much of their extra wealth to more imports. Latin America has been the biggest beneficiary, with its export volumes up 9.6% year-on-year in the first half of 2015.

But oil prices can’t fall much further. And as you’ve surely noticed, many consumer goods markets in the US are already saturated with imports. By my best estimate, close to half the value of manufactured or processed goods consumed in the US is imported. According to the BEA’s input-output tables, $4.4 trillion worth of manufactured or processed goods were consumed in the US in 2013 by non-manufacturers, not including logistics and trade mark-ups. That year $2.3 trillion worth of goods were imported, of which some obscure but small fraction was re-exported.

Europe has been more or less pulling its weight in global trade since last year. The Euro Area has increased its merchandise imports at an average pace of just over 2.5% a year since the beginning of 2014. But that pace is also unlikely to accelerate. With its numerous highly integrated economies, Europe’s goods markets are already very saturated with imports. International trade within the European Union accounts for about a fifth of global international trade.

Like the name of my blog says, the world economy is already globalized. I believe there’s still much more to come, especially in global trade of services. And of course, any globalized supply chain has at least as much natural potential for growth from improvements in quality and efficiency as any domestic supply chain. But global trade growth will no longer be driven by developed economies substituting imported goods for domestic products.

Trade among emerging markets is now the biggest potential driver of global trade growth. But that growth will be cyclical, and right now we are in a weak stage of that cycle.

Only when emerging markets are growing rapidly can the pace of global trade growth exceed the pace of global GDP growth. When emerging markets are in crisis, global trade will stagnate, even if developed economies are strong.