With the collapse in July 2008 of the World Trade Organization's Doha Development Round of trade negotiations, there is some concern that a rise in protectionism may bring about lower trade growth. While this may be the case, there are other, fundamental short-term and long-term factors that have caused Global Insight to take a gloomier view of prospects for international trade growth in the near future.
Short term: U.S. downturn is spreading
In the short term, the U.S. economic downturn and expansion of the credit crunch will have a global impact on trade. The outlook remains gloomy, despite the massive growth in U.S. exports that is often cited as a bright spot in a slow economy. It may not be quite as bright as many people think. For one thing, that growth is based on low-value goods (for example, scrap metal) and agricultural products. For another, it is subsidized not only by the federal government but also by the collapsing U.S. dollar.
![[Figure 1] Trans-Pacific trade in a short-term slump](/media-library/scq200803monetarymatters-fig1.jpg?id=53612429)
![[Figure 2] Pace of world trade growth will flatten](/media-library/scq200803monetarymatters-fig2.jpg?id=53612430)
What happens in the U.S. economy has a notable impact on Asia. Already, Asian exports are experiencing slower growth in 2008 than in 2007, and the annual percentage growth of liner trade from Asia to the world is now projected to be half what it was in 2006.
The decline in trans-Pacific trade lanes began in the first quarter of 2007, when American consumers lost confidence and cut back their purchases. As shown in Figure 1, trans-Pacific trade to North America declined sharply, from nearly 10-percent growth in 2006 to only 2.2 percent in 2007. In 2008 growth will remain negative.
On the other side of the world, the Asia-to-Europe trade continued to boom through most of the fourth quarter of 2007. But now it has become clear that European consumers, particularly those in the United Kingdom, are reacting no differently than their American counterparts. The Asia-Europe trade is just at the beginning of a significant slowdown, with this trade expected to actually decline in 2008. We expect trade in 2009 will remain soft on trans-Atlantic routes as well.
Long term: Changes in patterns of globalization
For the past 15 years or so, world economic and trade development has been characterized by economic globalization. Before then, most goods were produced at locations near the end markets. Since globalization, much of that production has been concentrated in low-cost locations that are far from the end markets. That cost-based shift in production led to rapid growth in international trade.
But rising energy costs do not bode well for the future of global trade, in large part because economic globalization increased energy consumption in two ways. First, it considerably increased worldwide demand for freight transportation, and therefore increased consumption of diesel and gasoline. And second, it helped promote an energy-consuming lifestyle all over the world. In developed countries, for instance, low-cost imports have allowed more people to afford automobiles, airconditioned houses with many electrical appliances, and long-distance travel by airplane. In developing countries, exports have brought wealth to a small portion of the population, who are then able to pursue a similarly acquisitive lifestyle. The impact on energy usage is huge. If just 30 percent of the Chinese and Indian populations were to achieve Western levels of consumption, then the world's consumer energy consumption would double. And there are billions more people, in those countries and elsewhere, who are striving to reach that level of prosperity.
Given these trends, it's not surprising that long-term energy prices are rising. Left alone, global market competition will see energy prices continue to rise until those high prices effectively suppress energy consumption to a level that meets supply. Now, developed countries are calling for developing countries to remove subsidies for energy consumption and let the market mechanism work. There has already been some movement in that direction: China recently reduced subsidies for fuel consumption, announcing increases in gas and diesel prices of 17 percent to 18 percent. Because oil traders understand that higher prices discourage consumption, world oil prices dropped by $2 a barrel at that announcement. If all countries were to remove their subsidies to discourage fuel consumption, world oil prices would rise at a slower pace.
Rising fuel prices have also considerably increased total shipping costs. For high-value and lightweight goods, such as electronics, shipping costs are still bearable. For low-value and heavyweight goods, such as iron ore, those costs can now exceed the value of the goods themselves. If fuel prices were to continue to rise, China might find it unprofitable to bring in iron ore and coal from overseas. At the same time, countries that are exporting less coal and ore to China might find it profitable to use those raw materials to manufacture and export more steel.
With wage rates increasing and the local currency appreciating in China, some investors are considering moving manufacturing to other countries with lower costs, such as Vietnam. However, many of these opportunities may already have slipped away. Rising oil prices and the declining U.S. dollar are causing worldwide price inflation, to the point where, for some types of manufacturing, the costs of imported materials now outweigh the savings from the difference in wage rates. Furthermore, Vietnam is just as far from most developed countries' consumer markets as China is. High transportation costs will deter additional manufacturers from establishing production facilities at locations like Vietnam if they are too far away from their end markets.
In fact, high transportation costs may force manufacturers to relocate production facilities closer to material suppliers or consumption markets, depending on which transportation volume (and expense) is larger—for the input materials or for shipments of the finished products.
The strong expansion of world trade has helped to reduce the difference in wage rates and returns on capital between countries. This is called "factor price equalization" in international trade theory, and we are seeing evidence of this at work in world markets today. This makes some export manufacturing no longer profitable in certain developing countries. Moreover, when more goods are produced at locations closer to their end markets, overall world trade growth may slow down, especially if some production reverts to domestic manufacturing. This and the other factors discussed in this article lead Global Insight to forecast a decline in world trade, as shown in Figure 2.
While we will, of course, see a cyclical rebound in trade once the economies of North America and Europe rebound, longer-term economic forces will continue to lead us into an era of slower growth in international trade.
