As most everyone now knows, the merits of open global trade have been a major issue in the 2016 US presidential campaign.
Some see risk that eventually new barriers to trade, and perhaps outright protectionism, will be the result, and that some argue will do harm to the global economy.
Supply Chain Digest Says... |
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| We are likely at a very important inflection point here over the near term direction of global trade, with huge implications. |
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But the reality is the global trade has already been slowing and of late even contracting. For many years from roughly 1990 up until the Great Recession of 2008, global trade volumes generally exceeded global economic growth, often by a considerable margin.
After the recession, global trade volumes slowed, and in the past few years have actually fallen below GDP growth. As one indicator of that trend, global ocean container shipping volumes grew by just 1% in 2015, versus global GDP growth of about 3-3.5% by most estimates.
But now, new research from London's Centre for Economic Policy Research (CEPR) finds that world export volumes have declined slightly starting in January of 2015 through March of this year.
"Except during global recessions, a plateau lasting 15 months is practically unheard of since the Berlin Wall fell," the CEPR report notes.
The report says that trade volumes have plateaued in both developed and developing economies.
Indeed, CEPR says that organizations such as the International Monetary Fund (IMF) and the World Bank, while publishing estimates showing a slowdown in world trade, did not get the actual data right. CEPR looked a product-level data in coming to the conclusion that since the start of 2015 there has no growth in global trade volumes at all.
For 2015, the IMF and the World Bank both estimated global trade growing at about 3% for the year. The CEPR analysis says trade actually fell by 1.9% year over year. The CERP says it cannot explain the discrepancy because while it publishes its own methodology, the IMF and World Bank do not publish theirs.
So the total swing between the 3.1% growth estimate of the World Bank and the -1.9% decline calculated by the CEPR is a substantial 5 percentage points.
In further support for its numbers, the CEPR notes that the RWI/ISL Container Throughput Index, which tracks data on container volumes in 81 ports handling more than three-fifths of the containers worldwide, reported that its index for May 2016 had fallen further and offered the following comment: "This is the lowest value computed for the index since the end of 2013 and suggests a continuous weakness of the development of the world trade in goods."
What's going? The world has already started drifting into protectionism, the report says, likely the result of a slowing global economy over the past few years.
The report finds that:
• Protectionist actions in 2015 were up 50% versus 2014 levels.
• Policy initiatives harming foreign commercial interests in 2015 outnumbered trade liberalization three-to-one.
• Since 2010 between 50 and 100 protectionist measures were implemented in the first four months of each year. In 2016 the total had exceeded 150 through March.
• G20 members were responsible for 81% of protectionist measures implemented in 2015.
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The report says that while taxes and duties appear to be rising worldwide, and even bigger factor is the growing number of countries requiring that some percentage of parts and materials for manufacturers in a given country must be sourced locally. And the report says countries are getting a lot more sophisticated in their approaches to such "localization measures," which now can include:
• Condition tax, tariff, and price concessions on local procurement;
• Condition bailouts, government contracts, and export financing on local sourcing;
• Tailor import licensing procedures to encourage domestic purchases;
• Reserve certain lines of business for domestic firms;
• Require that data must be stored and analyzed locally;
• Require that products be tested locally.
Corporate giant GE has already been adjusting to this new reality."
Rather than produce locomotives at a single location in the US, CEO Jeff Immelt recently noted that "now we have multiple global sites that give us market access." GE is pursuing similar strategies with its other manufacturing, services and software businesses. "A localization strategy can't be shut down by protectionist politics", he said in May during a university speech.
The flattening of global exports can be seen in the chart below from the report, which shows an index (baseline year of 2005 = 100) of global export volumes, which starting at the beginning of 2015 have clearly flatlined overall and for both developed and developing economies.
Global Trade Has Fallen Slightly Since Start of 2015
Source: Centre for Economic Policy Research
The report warns that "In a world where global commerce isn't growing any more, governments may conclude that securing larger slices of the world market ultimately requires tilting the commercial landscape against foreign firms."
But that could send the world down a path that "precipitate a 21st century variant of mercantilism that, unlike its predecessors in earlier centuries, affects more types of global commerce.
The report also quotes David Abney, CEO of UPS, as stating that "We're at a critical juncture in the history of commerce. There has never been more trade policy activity, never more momentum. Never more need to get trade agreements, starting with TPP, over the finish line. Reality says we must think and act beyond the rhetoric of protectionism and fear."
We are likely at a very important inflection point here over the near term direction of global trade, with huge implications.
The full report is available here: Global Trade Plateaus
What's your take on declining levels of global trade? Are localization measures the big issue, and how will this all play out? Let us know your thoughts at the Feedback section below.
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