Over the past decades, emerging markets, free-trade agreements, new producers and consumers along with technological advancements have made international trade not only cheaper but faster, allowing it to grow annually twice as fast as the world economy.
Many people now, however are skeptic about the continuation of this fast-paced growth in international trade. An evidence of this skepticism is the slow average growth of only 2.2% over past two years, which is much less than the 20-year average of 5.3% (as shown in the graph below). Many have attributed this slow growth to sluggish increase in imports and exports in developed countries (0.2% and 1.5% respectively) and moderate import export growth in developing economies (4.4% and 3.3% respectively). Most of us would agree that these poor growth rates were a result of the unhealthy condition of the world economy caused by EU’s lingering recession and high unemployment and Fed’s decision to taper QE that resulted in emerging market volatility with large current account imbalances.
Chart 1: Average international export and GDP growth
As can be seen in the chart above, growth in international trade in 2014 and 2015 has been predicted to be 4.9% and 5.1% respectively. In fact, some economists and trade specialists strongly believe that trade will grow around 8 percent annually over the next few decades. These figures are primarily based on business surveys and production data that depict global economic recovery especially in EU along with reduction in US unemployment and an expectation for the world GDP to grow by 3%, in market exchange rates, over the next two years.
Chart 2: World exports and imports:
Source: WTO Short-term trade statistics.
Table 1: GDP and merchandise trade by region, 2011-13
Annual % change
a Includes the Caribbean
b Hong Kong, China; Republic of Korea; Singapore and Chinese Taipei
Source: WTO Secretariat.
Unfortunately, these reasons are insufficient and growth predictions might be erroneous if the failure of some major deals like Transatlantic Trade and Investment Partnership (TTIP) between North America and Europe and the failure of 159 WTO signotaries in reaching a consensus on basic trade facilitation measures during Bali round, are not taken into account.
According to the WTO Director-General Roberto Azevêdo:
“It’s clear that trade is going to improve as the world economy improves. But I know that just waiting for an automatic increase in trade will not be enough for WTO Members. We can actively support trade growth by updating the rules and reaching new trade agreements. The deal in Bali last December illustrates this. Concluding the Doha round would provide a strong foundation for trade in the future, and a powerful stimulus in today’s slow growth environment. We are currently discussing new ideas and new approaches which would help us to get the job done — and to do it quickly.” (Farewell to the Age of Free Trade, Businessweek). In his statement, Roberto Azevêdo, has made it clear that growth in international trade cannot be achieved without cooperation among countries.
The premise that emerging economies would grow exponentially and technology would immensely facilitate in connecting businesses is partly flawed because technological advancement may not necessarily result in economic integration. For instance, the advent of 3D printing and synthetic biology has encouraged companies to keep operations in-house, reducing the incentive to outsource production in later stages.
Today, globalization and Internet have forced companies to use economies of scale for survival. As a result, industries have consolidated to be dominated by a single state-owned firm that is rarely forced into free trade; creating a protectionist environment for themselves.
Emerging markets particularly have not proven to be as resilient as it was expected. These economies especially India and Brazil have seen a tremendous decline in their growth over the past two years. Currency crisis (Argentina) and geopolitical situation with in countries in Middle East can have severe impact on trade. Many of these emerging economies are trying to achieve growth in services and not manufacturing. Services will employ fewer people than manufacturing and will face more trade barriers from the developed world.
A stronger consensus, in the international community, in favor of free trade can help overcome these challenges. Right now, every prominent trading economy is caught up in its own problems at home. For instance, Obama administration has been weakened by criticism on ObamaCare and, therefore, has little Congress support for the TPP and US-European trade pact while leaders in China are busy tackling land reform issues. Japan is fighting its deflation and aging population as UK is consumed in austerity.
Lack of global leadership in trade arena has given way to more protectionist policies. According to the findings of the Center for Economic Policy Research, a UK based think tank, G-20 recently passed 23% more protectionist policies than it ever did in the last five years. In fact, there has been a higher tendency towards regional agreements, which are not primarily focused on cooperation but preferential agreements aimed at discriminating against non-signatory members (as in case of China under TTP), making the fairness of free trade questionable.
Therefore, achieving the optimal level of cooperation among countries to ensure bilateral agreements that are mutually beneficial will not be an easy task. It will require leaders of major economies to act smartly and put efforts in making next rounds of WTO more fruitful. This is crucial because the world might be devastated by any contraction in world trade. Over the past decades, trade has not only made world economy more dynamic but helped in interlinking countries and their economies, reducing war and conflict. Hence, restoring trade is important economically as well as for the overall prosperity and peace of the world.