Tuesday, March 30, 2010

WTO: world trade volume +9.5% expected in 2010

According to WTO economists world trade is set to rebound in 2010 by growing at 9.5% (in volume), after a 12.2% contraction in the volume of global trade in 2009 (the largest such decline since World War II).

According to the WTO Director-General Pascal Lamy, “WTO rules and principles have assisted governments in keeping markets open and they now provide a platform from which trade can grow as the global economy improves. We see the light at the end of the tunnel and trade promises to be an important part of the recovery. But we must avoid derailing any economic revival through protectionism”.

According to the WTO press release (March 26):

Exports from developed economies are expected to increase by 7.5% in volume terms over the course of the year while shipments from the rest of the world (including developing economies and the Commonwealth of Independent States) should rise by around 11% as the world emerges from recession.

Measuring trade in volume terms provides a more reliable basis for annual comparisons since volume measurements are not distorted by changes in commodity prices or currency fluctuations, as they can be when trade is measured in dollars or other currencies.

According to the WTO, one positive development in 2009 was the absence of any major increase in trade barriers imposed by WTO members in response to the crisis. The number of trade-restricting measures applied by governments has actually declined in recent months. However, significant slack remains in the global economy, and unemployment is likely to remain high throughout 2010 in many countries. Persistent unemployment may intensify protectionist pressures, according to the WTO.

Why was the trade decline so large in 2009:

The 12% drop in the volume of world trade in 2009 was larger than most economists had predicted. This contraction also exceeded the WTO’s earlier forecast of a 10% decline. World trade volumes fell on three other occasions after 1965 (—0.2% in 2001, —2% in 1982, and —7% in 1975), but none of these episodes approached the magnitude of last year’s economic slide. Trade in current US dollar terms dropped even further than trade in volume terms (—23%), thanks in large part to falling prices of oil and other primary commodities.

Economists have suggested a number of reasons why trade declined so steeply, including the imposition of some of protectionist measures. But the consensus that has emerged centres on a sharp contraction in global demand as the primary cause.

This was magnified by the product composition of the fall in demand, by the presence of global supply chains, and by the fact that the decline in trade was synchronized across countries and regions. The weakness in private sector demand was linked to the global recession triggered by the sub-prime mortgage crisis in the United States. What began in the US financial sector soon spread to the real economy, with global repercussions. Limited availability of trade finance also played a role.

Sharp falls in wealth during the recession caused households and firms to reduce their spending on all types of goods, especially consumer durables (e.g. automobiles) and investment goods such as industrial machinery. Purchases of these items could be postponed easily in response to heightened economic uncertainty, and they may also have been more sensitive to credit conditions than other types of goods.

Whatever the reason for their decline, the reduction in demand for these products fed through to markets that supply inputs for their production, particularly iron and steel. Falling demand for iron and steel was also linked to the slump in building construction in countries where property markets had been booming before the crisis (e.g., the United States, the United Kingdom, Ireland and Spain).

According to the WTO's analysis, the fact that some products comprise a disproportionately large share of world trade, compared with their share of overall output, may have further depressed world trade flows relative to overall production (GDP or gross domestic product). For example, consumer durables and investment goods make up a relatively small fraction of global output but a relatively large part of world trade. Consequently, a decline in demand for these products would have had a greater impact on trade than on GDP.

The measured decline in trade was also inflated to some extent by the spread of global supply chains, in which goods may cross national borders several times during the production process before arriving at their final destination. Merchandise trade statistics record the value of goods every time they cross national boundaries, so when these data are summed to arrive at a figure for total world trade, the number will be larger in the presence of supply chains due to a certain amount of double counting.

The extent of this double counting is difficult to gauge due to a lack of readily available data, but it is reflected in the fact that exports have been growing faster than production since the 1980s. This ratio has increased steadily since 1985, and jumped by nearly one third between 2000 and 2008, before dropping in 2009 as world exports fell faster than world GDP.

A final factor that reinforced the 2009 trade slump was its synchronized nature. Exports and imports of all countries fell at the same time, leaving no region untouched. It is intuitively clear that the fall in world trade would have been smaller if contraction in some regions had been balanced by expansion in others, but this was not the case.

The synchronized nature of the decline is closely related to the spread of international supply chains and information technology, which allows producers in one region to respond almost instantly to market conditions in another part of the world. This usually contributes to global and national welfare by encouraging the most efficient use of scarce resources, but in the case of the trade collapse it may have spread the recession faster.

Trade prospects for 2010

Without any further upheavals in the global economy, world merchandise trade should resume its normal upward trajectory through the end of 2010, although some deviation from its previous trend line will persist indefinitely. The WTO Secretariat estimates that world exports in volume terms will grow by 9.5%, this year, while developed economies’ exports will expand 7.5% and the rest of the world (developing economies plus the Commonwealth of Independent States) will advance 11%. This projection assumes a resumption of global GDP growth in line with consensus estimates (2.9% at market exchange rates), as well as stability in oil prices and exchange rates. However, unexpectedly positive or negative economic news in the coming months could necessitate a revision of the trade forecast.

A 9.5% growth rate for trade is insufficient to bring about a return to pre-crisis levels this year, and even the 11% rate forecast for developing countries would not do the trick. However, two years of growth at this pace would result in trade levels surpassing the peaks of 2008. Developed economies, on the other hand, would require three years of growth to accomplish this.

These trade forecasts are more sensitive to changes in outcomes for developed countries than for developing ones, due to developed countries’ larger share of world trade.

There remain significant risks that the forecast could be over-optimistic, including the possibility of further increases in oil prices, appreciation or depreciation of major currencies, and additional adverse developments in financial markets.

However, there is also a possibility that trade may outperform the forecast, for example if unemployment rates fall more quickly than expected in developed countries.

Brief overview of trade developments in 2009

Trade data in volume (real) terms: merchandise

All countries and regions registered declines in the volume of their merchandise exports in 2009. The United States (—13.9%), European Union (27) (—14.8%) and Japan (—24.9%) all registered declines larger than the world average of —12.2%, while the smallest declines were recorded by the oil exporting regions of Middle East (—4.9%), Africa (—5.6%) and South/Central America (—5.7%). Asia (—11.1%) and China (—10.5%) also saw their exports decline, but by slightly less than the world average. (Table 2)

The situation was reversed on the import side, where the two largest declining regions were oil exporters — the Commonwealth of Independent States (CIS) (—20.2%) and South and Central America (—16.5%). Among the remaining countries, the United States (—16.5%) and the European Union (—14.5%) had declines greater than the world average, while Japan’s drop (—12.8%) was nearly equal to the world rate.

Trade data in value (nominal) terms: merchandise and commercial services

The value of world merchandise exports fell 23% to $12.15 trillion in 2009, while world commercial services exports declined 13% to $3.31 trillion. This marked the first time since 1983 that trade in commercial services declined year on year.

Transport services recorded the largest drop among service categories, followed by travel and other commercial services. The drop in transport services is unsurprising as this category is closely linked to trade in goods.

China has now overtaken Germany as the world’s leading merchandise exporter, accounting for almost 10% of world exports, and is second to the United States on the import side. The US share in world merchandise imports is 13% compared to China’s 8%.

Although the declines in export volumes of oil producing regions were less than the world average in 2009, their declines in value terms tended to be larger.

For example, the dollar value of exports from the Middle East, Africa and Commonwealth of Independent States fell by 33%, 32%, and 36% respectively, compared to a drop of 23% for the world.

This was due to the sharp drop in oil prices between 2008 and 2009.

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