Uncertainty could derail trade growth, says WTO

TRADE GROWTH is more promising, but it could be derailed by policy shocks and geopolitical uncertainly, warns the WTO . . .

GENEVA — With the outlook for the world economy likely to be better in coming months, international trade is also expected to rebound, with growth of 2.4 per cent for 2017, according to the World Trade Organisation’s latest forecast.

Leading indicators of real trade growth are up in the early months of 2017.

Container throughput at major ports has recovered from its 2015-16 slump to reach a record high level, with on-year growth of 5.2 per cent in January and February this year, says the Geneva-based global trade club.

A key index of world export orders also climbed to its highest level in several years in February.

Trade growth will reflect high global GDP growth, which is expected to be 2.7 per cent in 2017, inching up to  2.8 per cent next year.

There is increasingly a chorus among leading economists calling for synchronised global growth — something that has been absent for the past decade.

However, trade growth can be derailed by policy shocks and geopolitical uncertainty.

The WTO speaks of a prevailing sense of uncertainty because of unpredictable Government policies on monetary, fiscal and trade. These Government actions could stifle the promising expansion in trade, it says.

In its annual report on global trade trends, the World Trade Organisation says near-term economic and policy developments raise the forecast risk.  Taking into account the prevailing uncertainty, the WTO forecasts improvement in a range of 1.9 per cent to 3.5 per cent for global trade this year. Its forecasts a range of 2.1 per cent and 4.0 per cent in 2018.

If the world does achieve growth 2.4 per cent this year, it would be a concrete improvement from the 1.3 per cent in 2016.

The WTO notes that, for the first time since 2001, the ratio of trade growth to GDP growth fell below 1:1 in 2016.

The reason was the slowdown in emerging market economies, which contributed much to the sluggish rate of trade growth in 2016. These countries are expected to return to modest growth this year.

The WTO says its more promising forecasts for 2017 and 2018 are predicated on certain assumptions, and there is considerable downside risk that expansion will fall short of these estimates.

“Attaining these rates of growth depends to a large degree on global GDP expansion in line with forecasts of 2.7 per cent this year and 2.8 per cent next year,” it says.

The key global concerns today are unexpected inflation that could lead to higher interest rates, and fall-out from the UK’s exit from the European Union. These developments could crimp the rate of trade growth.

It says dollar values of international trade flows have been strongly influenced by exchange rates in recent years. In 2016, world merchandise exports were valued at US$15.46 trillion – down 3.3 per cent from the previous year.

All regions recorded declines in exports, with the smallest drop registered by Europe, which was down 0.3 per cent. Europe recorded a small increase in imports — up 0.2 per cent,

The WTO says that, historically, the volume of world merchandise trade has tended to grow about 1.5 times faster than world output, although, in the 1990s, it grew more than twice as fast.

Since the financial crisis in the last decade, however, the ratio of trade growth to GDP growth has fallen to around 1.1 times. Last year was the first in 16 years that this ratio dropped below 1 to a ratio of  0.6 times.

The ratio is expected to partly recover this year, but remains “a cause for concern” for the WTO.

The trade body is looking into the causes for what it terms “reduced sensitivity of trade to GDP” to explain the post-crisis trade slowdown in terms of the expenditure components of demand – consumption, government spending, investment and exports.

Import intensity can change over time with implications for world trade, the WTO says. As an example, the import content of Chinese investment spending fell from around 30 per cent in 2004 to 18 per cent in 2014 as China sourced intermediate goods domestically.

Meanwhile, the imported content of German investment rose from 24 per cent to 38 per cent between 1995 and 2014.

“These changes could conceivably alter the geographic distribution of trade, with stronger trade in Europe and weaker trade in Asia,” says the WTO. “Low oil prices would also be expected to reduce investment in the energy sector, which probably contributed to weakness of imports in resource-exporting regions in 2016.”

Commenting on the latest trends in the report, WTO Director-General, Roberto Azevedo, said weak international trade growth in the last few years largely reflects continuing weakness in the global economy.

Trade had the potential to strengthen global growth if the movement of goods and supply of services across borders remains largely unfettered, he said.

However, if policymakers attempted to address job losses at home with severe restrictions on imports,  trade could not help boost growth and may even constitute a drag on recovery.

 Azevedo said that although trade does cause some economic dislocation in certain communities, its adverse effects should not be overstated, nor should they obscure its benefits in terms of growth development and job creation.

 “We should see trade as part of the solution to economic difficulties, not part of the problem,” he said. 

The loss of roughly eight of every 10 jobs in the manufacturing jobs is due to innovation , automation and new technologies, he said. 

The answer was therefore to pursue policies that reap the benefits from trade, while also applying horizontal solutions to unemployment which embraced better education and training and social programmes that could quickly help get workers back on their feet.