Our latest survey shows that manufacturers have experienced fairly static sales to most key markets over the past three years, which leads us to ask the question of what might be behind this weaker performance.
A decade of below-trend growth
In the aftermath of the financial crisis, world trade experienced a sudden, severe arrest falling by 10.4% in 2009. As the slump moderated, some expected world trade to be back on track by mid-2010 although these were what-if scenarios rather than serious forecasts. And the long-awaited recovery is far from complete.
Although trade flows bounced back from their 2009 trough, they slowed markedly afterwards. At the end of 2016, the volume of global trade was still far below its pre-crisis trend and its pace has been unusually subdued since 2012, growing half as fast as it did between 1970 and 2007. Compared with earlier episodes of recovery, this time was the longest period of below-trend growth in 40 years.
Who’s to blame?
- The trade slowdown was largely widespread across countries.
- Compared to the pre-crisis period, growth in trade flows during 2012- 2015 slowed in 143 out of 171 countries according to the IMF.
- The trend was common across advanced as well as emerging and developing market economies, yet with some differences in terms of when the slowdown occurred.
- Similarly, the slowdown of trade in goods was evenly spread across all product categories.
Cyclical or structural?
We need to understand whether the slowdown is mainly a reflection of the subdued economic outlook that has prevailed since the financial crisis (cyclical) or a sign of a deeper, structural disruption in global production and trade (structural). The prevalence of one factor or another requires fundamentally different policy responses. However, not that the answer to this is straightforward, as no consensus among economists has emerged so far.
The weakness in global activity in recent years has undoubtedly affected world trade patterns. The past decade was not short of economic disasters: the great recession following the financial crisis, the sovereign debt crisis in Europe and more recently, China’s rebalancing and the collapse of oil and commodity prices.
How much of the trade slowdown can be accounted for by this weakness in economic activity is still under debate. Most estimates attribute around half of the trade slowdown to demand factors (40% according to the OECD, 50% according to the ECB, and 60% according to the IMF).
While cyclical factors have played an important role earlier in the financial crisis period, they fail to explain why the weakness in trade flows has persisted for so long. Beyond the numbers, structural factors appear to play an important role in explaining the slowdown in world trade.
What are the structural factors?
Global Value Chains in retreat – one explanation of the structural shift in world trade patterns is that the expansion of global value chains (GVCs) might have reached its limit and is now going into reverse.
Protectionism comeback – trade liberalisation stalled in the aftermath of the financial crisis. The years following the great trade collapse have seen a surge in protectionist measures as governments attempted to protect local businesses from the consequences of the economic downturn.
In 2016, the Global Trade Alert reported that three-fifths of trade distortions imposed in 2009, as a temporary response to the crisis, were still in place.
Trade finance drying up – the regulatory environment has gone through significant changes since the financial crisis affecting the supply of bank-intermediated trade finance, along with a hefty pickup in their cost. The tightening in trade finance conditions is estimated to explain one fifth to one sixth of the trade slowdown.
There's more analysis and commentary on these factors, including whether manufacturers have experienced these, in the report