World trade growth has ground to a halt as the commodity price slump hits economic growth in emerging markets and with it their demand for imported industrial equipment, supplies and consumer goods.
World trade volumes were unchanged between June and August compared with the same period in 2015, according to the Netherlands Bureau of Economic Policy Analysis (CPB) (“World Trade Monitor”, October 2016).
Growth in volumes has been unusually weak since 2012 but the recent slowdown has pushed growth down to zero.
Trade has been both an important engine of economic growth and is in turn strongly influenced by the increase in output since the end of World War Two.
Trade volumes grew roughly twice as fast as real global economic output between 1985 and 2007 but have since barely kept up.
“Such prolonged sluggish growth in trade volumes relative to economic activity has few historical precedents during the past five decades,” according to the International Monetary Fund.
Slower GDP growth can explain about three-quarters of the slowdown in global trade volume growth since 2012, according to the IMF (“World Economic Outlook”, IMF, October 2016).
Most of the slowdown in trade growth is the result of slower growth in economic output, especially in emerging markets, which rely heavily on imported equipment and intermediate products to make their exports.
Emerging economies provided the fastest growth in trade volumes before 2007 and then helped sustain growth rates until 2014.
But many of them rely heavily on commodity exports and as the commodity boom has turned to a slump their economies have contracted and import demand has fallen.
Emerging markets’ imports have shrunk by 3.6 percent in volume terms over the last year while advanced economies’ imports are up by 2.1 percent, according to the CPB.
Capital investment and the export of raw materials and manufactured items are particularly import-intensive sectors.
Emerging markets imported lots of capital equipment and other supplies to expand their commodity production during the boom (“Commodity slump intensifies risks to emerging markets”, Reuters, Oct. 8 2015).
Rising incomes also stimulated a big increase in local consumption, some of which was in turn spent on imported goods and services.
The commodity slump has hit global trade growth hard as capital investment has shrivelled and emerging economies have struggled to avoid recession.
Import volumes have fallen across all emerging markets since 2014 but the decline has been especially sharp in Latin America, Africa, the Middle East and Central and Eastern Europe.
Every one of these areas relies heavily on commodities for economic output and export earnings (“State of Commodity Dependence 2014”, United Nations Conference on Trade and Development, 2015).
With the more advanced economies also growing more slowly than before the slowdown in trade volume growth comes as no surprise.
“Weak trade growth is largely a symptom of the synchronized slowdown in economic activity across advanced and emerging market and developing economies,” the IMF concluded in its World Economic Outlook.
The IMF noted around a quarter of the slowdown in global trade volume growth could not be explained by slower economic growth alone.
The Fund speculates that a slowdown in trade liberalization, an upsurge in antidumping and the proliferation of more subtle non-tariff barriers could help explain the extra slowdown in trade growth.
The creation of global value chains by multinational corporations via outsourcing and off-shoring during the 1990s and early 2000s may also have run its course and be contributing to a slowdown in trade growth.
As a result, the Fund urges policymakers to resist protectionism, revive trade liberalization and dismantle remaining non-tariff barriers to support global trade and a new round of global value chain development.
But the main lesson is that the slowdown in global trade growth stems in part from the commodity slump and the slowdown in China, and will be reversed when the commodity cycle turns.