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Eric Justian headshot

Has the Global Trade Engine Stalled?


For over 40 years, global trade has grown at a pretty decent clip relative to GDP. That is, up until now.

For the first time in nearly half a century, trade between nations has grown slower than the global economy.  Some economists believe trade may be at a peak, at least for a while. "Peak Trade" suggests the world could hit a long-term ceiling in terms of the effects of trade growth as an economic driver.

Why would this be a problem? Because international trade accounts for about 60 percent of the world's GDP. In the 1990s, it accounted for about 40 percent of the world's GDP. So, a good chunk of economic growth for decades came from (and resulted in) increased trade. This reduction in trade growth over the past few years could explain why economic recovery has been somewhat sluggish. Maybe the engine that fueled rapid international economic growth has maxed out.

There's plenty of disagreement, of course, as to why trade growth has slowed. And there's disagreement as to whether it's a cyclical or structural thing.  A cyclical explanation would suggest that the slow-down is relatively short-term and it' will correct itself over time ... maybe it's a result of more trade protections implemented after the economic crisis; maybe it's a shift in trade toward services rather than goods. A structural explanation, on the other hand, would suggest that there are deeper and more permanent forces at play.

The International Monetary Fund is suggesting the latter. According to the IMF, we seem to be facing a long-term "structural" slow-down in trade.

For one thing, the world trade seems to have become less responsive to income. In the good old days of the 1990s, a 1 percent increase in global income translated into a 2.2 percent increase in global trade! Not bad. Now, a 1 percent increase in global income translates to just a 1.3 percent increase in global trade. So, not only is income growth slower worldwide, but trade is also less responsive to income growth.

So, it used to be like this: The more global income climbs, the more we trade. And the more we trade, the more global income climbs, and so on. Now we seem to be at a point where when global income climbs, we trade at about the same rate.

Another issue is internal consolidation. Much of the world's trade growth came from increased supply chain imports and exports: One nation makes the springs, another makes the widgets, a third makes the doohinkers, and still another assembles them into a final product. However, internal consolidation and more sophisticated manufacturing methods are allowing important trading nations, like China, to simply manufacture a greater share of the components themselves. In the 1990s, China imported about 60 percent of the components it used in manufacturing. Today China imports about 35 percent of those components. And China is one of the largest trading nations on earth. It makes a big difference, worldwide, when they don't need to buy your parts. In fact, the two largest trading nations, China and the U.S., have basically flatlined in terms of import shares over the past decade.

As far as I can tell, lower trade-to-income responsiveness and internal consolidation are two of the larger reasons the IMF seems to conclude we're looking at long-term structural causes of our trade slow-down. Says the IMF:

"The high responsiveness of trade to growth in the 1990s reflected the increasing fragmentation of production driven primarily by the United States and China. That particular engine appears to have exhausted its propulsive energy for now."
Image credit: Ingrid Taylar: Source
Eric Justian headshotEric Justian

Eric Justian is a professional writer living near the natural sugar sand beaches and singing sand dunes of Lake Michigan in Muskegon, Michigan. When he's not wrangling his kids or tapping at his computer, he likes to putter in his garden, catch king salmon from the Big Lake, or go pan fishing with his boys. As a successful blogger his main focus has been energy, Great Lakes issues and local food. Eric is a founding member of the West Michgian Jobs Group, a non-profit organization that evolved from a Facebook page called Yest to West Michigan Wind Power which now has over 8000 followers. West Michigan Jobs Group promotes independent businesses and sustainable industries in the West Michigan area. As the Executive Director of that organization he has advocated renewable energy as both a clean energy alternative for Michigan and a new industry with which to diversify our economy and spark Michigan innovation and jobs.

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