Where Did All the Trade Go?
December 1, 2014
In the wake of the world financial crisis, policy leaders and scholars alike have focused mainly on the trifecta of monetary policy, fiscal policy, and financial regulation. But another policy puzzle merits more attention. Where did all the trade go?
A hallmark of the world economy in the late 20th and early 21st centuries was trade in goods and services expanding at about double the growth rate of world output. According to the World Trade Organization, between 1980 and 2011 global trade in goods and services expanded at an average annual rate of about 7 percent. During that same period, the International Monetary Fund reports that global output expanded at an average annual rate of just 3.4 percent. In 2012 and 2013, however, world trade expanded by just 2 percent and 2.9 percent, respectively—slower than world-output expansion each of those two years.
Rapid growth in world trade was driven by a number of related forces: trade liberalization through meaningful multilateral agreements such as the Uruguay Round of the General Agreement on Tariffs and Trade and the Information Technology Agreement of the WTO; trade liberalization through unilateral initiatives, especially in many emerging markets such as China, India, and Mexico that chose to integrate into the global economy through steps such as acceding to the GATT and WTO; technology innovation, especially the information-technology revolution, which dramatically slashed costs of communication and coordination and facilitated the global flow of knowledge and innovation; political upheaval, such as the fall of the Berlin Wall and broader Iron Curtain that allowed hundreds of millions of people to become part of the global economy; and fast economic growth, which tends to boost both exports and imports of countries enjoying that income expansion.
So, what to make of trade’s sharp slowdown of late? Sobering new research from the World Bank and IMF indicates that, rather than being a lingering post-crisis hangover soon to recede, this slowdown may be structural and thus more persistent.
Yes, these scholars say, some of the slowdown is cyclical—especially the nearly-absent recovery and thus growth in import demand in the European Union, which still accounts for nearly a third of global trade given the size of trade flows among all the EU countries. But much of it seems to be structural, in particular driven by the slowed expansion of global-supply-networks trade of two countries: China and the United States. These scholars build their analysis around findings such as the share of imported intermediate inputs in China’s exports falling from about 60 percent in the mid-1990s to around 35 percent today.
Obviously, the world as a whole is a closed economy that cannot trade with, say, Mars. And trade does not substitute for the largely domestic investments that build the foundation for high-quality jobs, such as education and infrastructure. But rapid growth in trade over the past 30-plus years has been critical in supporting the ability of many countries to create high-paying, high-opportunity jobs connected to the world through linkages such as emerging global supply networks.
Research continues to document the many channels through which companies and their workers connected to global markets tend to be more innovative and more productive. Indeed, just last week an interesting new National Bureau of Economic Research study reported results of a novel experiment in which certain small rug manufacturers in Egypt were randomly selected—by the researchers partnering with a U.S.-based non-governmental organization as trade intermediaries—to have the chance to export their rugs to foreign buyers. What did this randomized control trial find? Relative to the non-exporting control firms, “treatment firms report 15-25 percent higher profits and exhibit large improvements in quality alongside reductions in output per hour … we find evidence of learning-by-exporting whereby exporting improves technical efficiency.”
These Egyptian rug manufacturers are Exhibit A of the biggest reason to worry about trade’s slowdown: it will reduce the hopes of so many around the world to build a better life through opportunities beyond their borders. The world of trade and investment policy often makes people’s eyes glaze over amidst arduous negotiations and arcane rules. But all the effort and all the details really matter for people’s lives. Business and policy leaders alike need to work to make trade’s slowdown a thing of the past.
Articles © 2014 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2014 Trustees of Dartmouth College. All rights reserved.