Why is world trade growth slowing?

  • 2016-10-13
  • The Economist

Global trade is in a grim state. Between 1985 and 2007 trade volumes shot up at around twice the rate of global GDP; since 2012 the rate of growth has barely kept pace. Things appear to be getting worse. On September 27th the World Trade Organisation slashed its forecast for growth in trade of goods from 2.8% in 2016 to just 1.7%, implicitly predicting that for the first time in 15 years, trade would grow more slowly than GDP. Trade lets countries specialise, it allows ideas to spread and it promotes healthy competition. Policymakers interested in economic growth should be asking why it is so weak.

Trade depends on a mix of demand and supply in different countries. It can be bunged up by protectionism, and deflated by depressed economies (exports and imports depend on demand). It also depends on more benign factors; the rapid growth of the 1990s and early 2000s was itself unnaturally high. Two forces added momentum to trade over that period: the falling costs of doing business across borders and China’s entry into the global economy. Lower costs encouraged a web of supply chains to form, so that parts that were previously manufactured domestically could be shipped and assembled in foreign countries. Now that costs are not falling as quickly, the process may have run its course. Second, China’s spectacular economic growth over the 2000s was driven by huge increases in investment, which gobbled up imports such as oil and iron. As China switches to a more consumption-led approach to economic growth, the growth in trade volumes will naturally slow.