Is this a short term or long term issue? What does it mean for container lines and mega ships?
For the third year in a row, the rate of growth in global trade is set to trail the already sluggish expansion of the world economy, according to data from the World Trade Organization and projections from leading economists. Before the recent slump, the last time trade growth underperformed the rate of an economic expansion was 1985.
“We have seen this burst of globalization, and now we’re at a point of consolidation, maybe retrenchment,” said WTO chief economist Robert Koopman. “It’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing as they should.”
Since rebounding sharply in 2010 after the financial crisis, trade growth has averaged only about 3% a year, compared with 6% a year from 1983 to 2008, the WTO says.
Economists blame the slowdown on many factors, from China’s shift away from certain kinds of manufacturing to a decline in international investment. They also point to a dearth of new big trade agreements and trade barriers erected after the 2008 downturn, as well as a newfound reluctance by companies to source products and components far from home.
This year the WTO is expected to cut its 2015 trade forecast a second time after a sudden contraction in the first half of the year—the first such decline since 2009.
Much of the slowdown comes from the sluggish performance of emerging economies, including China, compared with their brisk growth in prior decades. The shift has prompted economists to wonder whether the prolonged burst of trade-driven globalization is over.
“It’s fairly obvious that we reached peak trade in 2007,” said Scott Miller, trade expert at the Center for Strategic and International Studies, a Washington, D.C., think tank.
World trade volumes may rebound a bit in the second half of the year, but grow just 1% for all of 2015, estimates Paul Veenendaal, an economist at the CPB Netherlands Bureau for Economic Policy Analysis, which closely follows world trade. That is well behind the expected level of global economic growth, forecast at 3.3% by the International Monetary Fund.
“What we saw in the first half of the year is that the fall was from a remarkable decline in trade in China,” Mr. Veenendaal said. “My guess is that it will pick up again this year, but I’m not sure.”
For the first seven months of the year, U.S. exports dropped 5.6% to $895.7 billion. The value of South Korean exports shrank 14.7% in August from a year earlier, the sharpest fall in six years, as shipments to China dropped. Chinese imports in August fell 13.8% in dollar terms from a year earlier, after an 8.1% decrease in July.
In the 1980s and 1990s, China’s manufacturing economy began its rapid ascent, and the collapse of the Soviet Union expanded trade in new market-based economies. Beijing joined the WTO in 2001, nudging down some tariffs and committing to observe many global rules of the road. Other emerging economies also took off, buoyed by cheap credit, and many companies sought to fatten profit margins by outsourcing production to countries with lower labor costs.
“When I started with Caterpillar in 1975, our major export markets were rich countries—Canada, Australia, Europe and oil-producing countries,” said Bill Lane, director of global government affairs at Caterpillar Inc. “Fast forward 40 years, and today our big customers are the developing countries—Latin America, Africa, the Middle East, Asia.”
Now, some of those countries are giving Caterpillar its biggest headaches. The company said sales of construction equipment in Asia fell 30% in the first quarter, led by declines in China and Japan.
During the 2008 crisis, trade collapsed sharply as credit dried up and economies contracted around the world. Trade later appeared to recover, although it never returned to its previous clip.
Part of the reason is companies have been worried about making big capital investments in plants, economists say. Another factor is Europe’s slow recovery, which has weighed on trade among the 28 countries of the European Union, as well as reducing the EU’s demand for Chinese goods including machinery and electronics, not to mention U.S. exports.
Meantime, disasters such as the tsunamis in Asia, disruptive flooding in Thailand and even the recent explosion at China’s port of Tianjin are leading corporate executives to rethink the wisdom of supply chains spanning the globe.
“There has been some shortening of the global value chain. There has been some re-shoring of production—or at least restructuring of value chains to move production closer for security,” said Douglas Lippoldt, senior trade economist at HSBC Holdings PLC.
Another drag is the failure of government officials to complete major trade agreements. The WTO’s Doha Round of negotiations that envisioned deep trade liberalization has stalled, although the Geneva-based trade body completed a deal on removing impediments that could boost trade in developing countries. Countries that trade over $1 trillion a year in high-tech goods agreed to eliminate tariffs on the products, but the time frame is unclear. Advanced economies, now more reliant on services and newer technologies than traditional manufacturing, would see some additional growth from new trade agreements like the Pacific deal President Barack Obama has been seeking to conclude for years, economists say.
Critics of globalization warn that bursts of trade can shift jobs and alter cultures around the world. Still, most experts see trade as a major engine for raising overall living standards because international shipments broaden the pool of customers for a given product and enhance competition and specialization, cutting prices for consumers.
Asian countries that have opened their borders have seen millions of people move from small farming to better-paying jobs at exporting factories. Today’s lackluster trade growth could slow efforts to alleviate poverty, economists say.
While China’s economic policies and inexpensive labor helped build a manufacturing powerhouse, Beijing is now engineering a giant shift toward consumption, services and technologically advanced manufacturing.
China has started building many of the products it used to import. In 2004, China’s exports of machinery and transportation equipment started to exceed its imports as domestic production surged. By 2013, those exports appeared to plateau at over $1 trillion.
Some multinational companies this year say they are finding it harder to get goods into—and out of—China.
Fiat Chrysler Automobiles NV said its Maserati shipments to China dropped 37% in the second quarter, partly the victim of an anticorruption campaign that discourages conspicuous consumption. Fiat Chrysler Chief Executive Sergio Marchionne said its imported Jeep models face similar challenges in a country that increasingly is buying domestically made goods.
“What I think is impacted is the ability to extract a significant margin for cars that are imported from the outside for a variety of reasons,” Mr. Marchionne told analysts in late July. “We have seen a drop both in volumes and the ability to generate margins. And I think that’s something that’s permanent.”
In times of crisis countries have devalued their currencies to spur exports and boost growth, but foreign-exchange moves have little chance of raising trade overall and may be unappealing given international pressure to avoid devaluation and its limited economic upside.
Japan’s recent quantitative easing weakened the yen but did little boost to net exports, according to a paper from the Brookings Institution this month. For China, letting the yuan weaken further would give exporters only a limited advantage, given their imported materials and foreign debt payments.
Corrections & Amplifications:
Before the recent slump, the last time trade growth underperformed the rate of an economic expansion was 1985. An earlier version of this article incorrectly stated the year was 1983. (Sept. 14, 2015)
Write to William Mauldin at email@example.com