Daily Management Review

The World Trade Decline Has Hit Emerging Markets


Everyone is alarmed with the new word ‘diversification’ in Tilbury (one of the three largest container ports in the UK). Less space is allocated to traditional container transportation. Instead, the owners of the port are investing in new projects.

A giant metal frame soon will turn into a refrigerated warehouse for perishable goods destined for British supermarkets. According to the director for the production of Tilbury Perry Glading, container ports of the country are faced with the problem of production capacity surplus.

In response, Tilbury is trying to exploit its territory of nearly 500 hectares to the utmost.

Statistics of World Trade confirms Glading’s concerns. Exports of goods in South Korea, often referred as a barometer of the global economy, in August fell by almost 15% in dollar terms compared to the previous year.

In China, the most important link of the global supply chain, exports fell by more than 5%. The slowdown has also been recorded in the UK and America.

In the first six months of the year the global trade fell by more than 13% year on year. Since the mid-1980s. and up to the middle of last decade, the annual trade growth was 7%, reminiscent of the British magazine The Economist.

The current decline can be partially explained by price changes. Strong dollar led to the collapse of nominal value of the goods in other currencies.

Commodity prices have fallen sharply: it reduces not only the cost of raw materials being transported across the globe, but also helps to contain production costs and, therefore, prices for a wide variety of industrial products.
In terms of volume, trade continues to rise: in the first half of 2015 by 1.7% compared to last year. Yet, this is far below the long-term average (about 5% per year).

Growth is even less in emerging markets: only 0.3% year on year.

At the beginning of the 1990s, trade had been increasing slightly faster than global GDP.

Later, China and the former Soviet Union began to integrate into the global economy; the World Trade Organization (WTO) was created for trade promotion, and technological changes have facilitated the task of creating long and scattered around the world supply chains.

As a result, trade grew twice faster than the global economy from 2003 to 2006. However, since then it has been steadily slowing. In the last two years, global GDP increased much faster than trade.

The slowdown seems somewhat strange due to lower transport costs (cheap oil are supposed to stimulate international commerce).

The problem is partly cyclical. Europe, which accounts for about a quarter of global production and one-third of world trade is going through "an extremely long cyclical downturn", said an expert of Dutch Bureau for Economic Policy Analysis Paul Veenendaal.

GDP growth in Europe was 0.8% in 2012-2014 compared with 3.5% in 2005-2007.

At the same time, decline in demand for raw materials in China is hitting hurt the economies of commodity exporters. Yet, these countries are also the end markets for many Chinese exporters, what creates a vicious circle.

However, according to experts, it is possible to prevent the stagnation of trade. Rich countries need to speed up work on new international trade agreements as soon as possible to ratify those that have already been negotiated.

Examples of these documents include the WTO agreement on trade facilitation, reached in 2013 and aimed at reducing the cost of trade in poor countries, as well as the Trans-Pacific Partnership (TPP).

Also there should be reforms in emerging economies, the liberalization of agriculture and the training of workers of the service industry sector. But the leaders of Indonesia and Brazil have already realized that it is not the best time to take difficult decisions after the collapse.

source: economist.com