Global Trade Under Pressure

Why world trade has slowed down in recent years and what can be done

Global trade has been stagnating for some years now. One reason for this is the increase in protectionist policies. This in turn is caused amongst other things by the growing dissatisfaction among citizens in developed economies regarding the impacts of international trade on their living conditions.

Slowdown in global trade

Over the last 50 years, global trade has expanded much more strongly than the world’s gross domestic product (GDP). Even in the years after the fall of the “Iron Curtain”, the growth rates for global export volumes were almost always higher than those for global GDP (see Figure 1). The exceptions here were just the years that had economic crises (2001: the bursting of the dotcom bubble, and 2008/2009: the collapse of Lehman Brothers). Since 2012, however, exports have grown more slowly than the world’s GDP.

The slowdown in global trade becomes much clearer if we examine the difference between the annual growth rate for global exports and the growth rate for global GDP. Between 1990 and 2016 the growth rate for global exports was 2.1 percentage points higher on average than the global GDP growth rate (see Figure 2). Since 2012, the difference between export growth and GDP growth has been smaller than 2.1 percentage points, and sometimes even negative.

The rise of protectionism

There are various reasons for the slowdown in global trade. Many of them are relatively simple: the weak growth in many countries following the Lehmann bankruptcy, falling commodity prices and the trend towards a services economy.

The increase in protectionism, however, creates a problem:

• In June of this year, the European Commission stated that the number of trade barriers which European exporters are exposed to rose by 10 percent between 2015 and 2016. EU Trade Commissioner Cecilia Malmström therefore noted that “protectionism is on the rise”.
• In the run-up to the G20 Summit in Hamburg, the “Centre for Economic Policy Research” produced a report focusing on the protectionist measures of the G20 countries. It concluded that the number of protectionist measures taken by the G20 countries since November 2008 has risen sharply (see Figure 3). A total of 6,600 such measures were implemented.

The rise in protectionism is illustrated by the fact it is becoming increasingly difficult to conclude free trade deals.

Why is protectionism on the rise?

In my view, the tendency towards isolation is caused primarily by the growing dissatisfaction among citizens in developed economies regarding the impacts of international trade on their working and income conditions.

The international division of labour and the associated international trade certainly have many advantages: they have lowered poverty worldwide, increased productivity and raised economic growth. This improves the material and non-material prosperity of the people (life expectancy, level of education, etc.) and enhances their development opportunities.

At the same time, however, there are also negative side effects. Countries are losing power because of the international markets, creating a feeling of helplessness. Competition with low-wage countries is impairing work and income opportunities in industrialised countries, particularly for those with low qualifications, which results in social tensions.

Conclusion

Developed economies have to find ways of furthering international trade so that everyone can benefit from the spoils of the international division of labour. If these efforts are unsuccessful there is a risk that criticism of globalisation will rise, populism will grow, and further isolation tendencies will rear their head. This would reduce economic growth and material prosperity in all countries.