The Post-Crisis Trade Plateau: Have We Topped Out?

With trade at the forefront of more political platforms than ever, and resistance to its proliferation mounting, one might lose sight of the following fact: global trade growth is in decline. Though explosive growth in trade was a norm for around six decades following the World War II, the global financial crisis has reversed this trend, and the slowdown seems chronic. If growth had continued at pre-crisis rates, trade would be 15% higher today, correlating to several trillion current US dollars (1). Despite this, many of trade’s negative effects are more prominent now than before: making for the rise of anti-trade platforms around the world, most notably the Donald Trump’s presidential campaign in the U.S. and the “Leave” campaign leading up to the British referendum on EU membership. 
 
Total trade volume has had a rough year, stagnating in Q1 and declining 0.8% in Q2 (2). Growth rates for the next few years are expected to be sluggish. This has been the case since 2009, when global trade fell massively. Even as the global economy has dug itself out of recession – GDP growth has been restored to the above-3% range, and developing and advanced economies alike are in definitive recovery – trade has gone flat (3).
 
This decoupling of economic growth and trade growth is especially confounding to economists. Between 1950 and 2008, the two were often inextricably linked. Trade growth was often a constant multiple of GDP growth (between 1990 and 2007, that multiple was around 2; that is, trade grew twice as fast as GDP). As a natural result, trade as a percentage of GDP grew considerably, from 25% to 60%. Now, the trade to GDP ratio has held tight at 60% for nearly a decade, as though it reached some kind of constraint or plateau (4)(5). 
 
There are a few factors in play. China’s economic slowdown and the Euro Area crisis are perhaps the most glaring. Trade within the EU accounts for 1/3 of global volume and China another 10%. Both of these markets were direly affected by the Great Recession and are in extended periods of low demand (6). Global investment also plays a role. A high sense of uncertainty due to social, political, and economic factors is keeping capital from being deployed (7). In the era of globalization, this effect is necessarily widespread – for example, a slump in investment in the U.S. directly causes exports from entire American value chains to fall. Makers of monetary policy have tried to remedy this by lowering interest rates, but the results are just not showing. 
 
The apparently chronic nature of this decline has led many to speculate about possible structural factors. Trade growth may have been a transitional phenomenon that occurred as globalization increased toward an upper bound. Facing inherent constraints to trade, many governments are shifting focus to bolstering domestic industry (8). That’s not even to speak of what may be a new normal in global trade policy – protectionism is on the rise and trade deals that were once standard are now increasingly difficult to finalize. CETA, for example, a recent trade pact between the EU and Canada that was fairly boilerplate, was blocked by certain European constituencies and almost failed to pass.
 
This is new territory for economics. While international organizations like WTO and IMF have recommended vehemently that bolstering trade be a continual piece of policy agendas, we may also be facing fundamental constraints to merchandise trade that we will have to grapple with until technological progress allows us to transcend them. In the near term, explosive trade growth on the scale of the 20th century looks highly unlikely. It will be up to global policymakers and diplomats to maximize trade in current economic circumstances.

​(1) Freund, Caroline. "The Global Trade Slowdown and Secular Stagnation." PIIE. Peterson Institute for International Economics, 25 Apr. 2016. Web.
 
(2) Appelbaum, Binyamin. "A Little-Noticed Fact About Trade: It’s No Longer Rising." The New York Times. The New York Times, 30 Oct. 2016. Web.
 
(3) "2016 WEO: Subdued Demand, Diminished Prospects." IMF.org. International Monetary Fund, ` Jan. 2016. Web..
 
(4) Freund, Ibid.
 
(5) Hoekman, Bernard. The Global Trade Slowdown: A New Normal? N.p.: VoxEU.org, 2015. VoxEU. Center for Economic Policy Research. Web.
 
(6) Ibid.
 
(7) Ibid.
 
(8) Ibid.

Image: © Pimages | Dreamstime.com - Mass Demonstration Against CETA And TTIP In Vienna Photo