By Cai U. Ordinario
The slowdown in global trade is “worrisome,” and economies are urged to further open markets to revive it, according to a Washington-based think tank.
In a brief, Peterson Institute for International Economics (PIIE) senior fellow Caroline Freund said, however, that the current slowdown in global trade is not an indicator of a possible recession.
The slowdown in global trade, however, has also affected the Philippines, as the country’s recent merchandise export earnings has exhibited lackluster growth.
“The general concern that the trade slowdown is an indicator of recession is probably unwarranted, at least, if past patterns are any guide. The decline in trade typically comes well into the recession, not in advance of it,” Freund said. “[But], the slowdown in trade is worrisome,” she warned.
Freund said global trade has been “unusually weak” since 2010. While the reasons for this remains unclear, she said four factors may be the cause for the weakness in global trade.
She said these factors include cyclical factors; structural changes in the global economy; the fragmentation of production; and the rebalancing that is occurring in China.
Cyclical factors, Freund said, explain most of what has happened to global trade. She said the slowdown in investments in trade, such as in cyclical trade components that include machinery and transport equipment, has affected global trade.
“Researchers find that trade movements are affected more by changes in investment than in consumption or government spending. The reliance of trade on investment helps explain why overall GDP growth in the absence of strong investment has dimmed trade growth prospects,” Freund said.
Freund added that structural changes in the global economy impeded trade. The global economy has relied on global value chains (GVC) since the 1990s, which boosted trade worldwide with GVC exports and imports growing to 52 percent of global trade in 2008 from 40 percent in 1995.
However, Freund said the growth trajectory of GVCs have started to weaken even before the recession. This weakness has continued to this day.
Another factor that affected global trade, Freund said, is the fragmentation of production which occurred through the creation of GVCs. While the GVCs boosted trade in the 1990 to 2000s, trade growth eventually slowed “once the supply chains were established.”
Last, the rebalancing in China, which shifted its dependence from investment-driven growth to consumption-led growth, has weaned Beijing’s economy from exports growth dependence.
“To revive the virtuous cycle of trade and growth, policy-makers should do more to open markets,” Freund said.
“The WTO could build on agreements in new and growing areas like services and e-commerce. A unified effort toward more open economies would build confidence and provide firms with greater incentives to invest,” she added.
The new frontier in global trade, Freund said, is services. She said over time, global trade will be more focused on trading data and technology.
In recent years, citing McKinsey Global Institute data, Freund said cross-border data flows increased to over 40 trillion megabytes in 2012 from 2 trillion megabytes per second in 2005.
The Philippines has benefited from the increased global trade in services. While the country’s merchandise exports were in the doldrums, services export growth was soaring.
Data obtained from the National Economic and Development Authority showed that the country’s services exports accounted for around 23.5 percent of gross total exports in 2009. In terms of value added, services contributed 44.1 percent of total exports in 2009.
Due to this, the services sector employed 20.7 million Filipinos in 2014; generated 599,000 jobs in 2014; and accounted for 56.7 percent of GDP in 2014.