The World Trade Organisation (WTO) has made one of those announcements that it not so frequently does, a forecast for an uptick in global trade growth. According to news published recently, global commerce is set to grow by 4.7 per cent this year. This is more than double the rate of 2.1 per cent estimated in 2013. The WTO had previously forecast that world trade would expand by 4.5 per cent in 2014. The latest update has raised the growth rate by 0.2 percentage point, small in magnitude but symptomatic of the buoyant trend indicated. The WTO has further predicted that trade growth would pick up next year further, reaching 5.3 per cent. WTO economists have noted that a growth rate of 5.3 per cent would bring trade growth back to its 20-year average. But even this upturn will remain well below historical trends, in particular the pre-crisis (i.e. before 2008) average growth of 6.0 per cent seen through most of the 1990s and 2000s.
Trade is a key measure of this state of world economy which it both stimulates and reflects. Increasing growth rates in countries measured by gross domestic product (GDP) underpins a surge in world trade. There is a second determinant of the size and trend of world trade: reduction in tariff barriers and simplification of the customs procedure or trade facilitation by which it has come to be known. An optimistic outlook for world trade assumes positive developments in both the determinants. The WTO itself has been cautious about a robust growth of world economy and has said that though prospects for global output (GDP) are better than they have been for sometime, leading economies (code name for America and countries in Europe) remain fragile. Alongside significant upside potential downside risks to growth in world economy have also been pointed out. Though the American economy seems to be gaining momentum and the European Union (EU) appears to have turned a corner, volatility is likely to be a defining feature of 2014 as monetary policy in developed economies becomes less accommodative. In other words, the days of easy money with low rate of interest may soon be over.
The process has already started in America with the Federal Reserve Bank winding down its quantitative easing (QE) through gradual tapering (by US$ 10 billion each quarter from the peak of US$ 85 billion). In the countries under EU, in spite of the heroic announcement by the chairman of European Central Bank (ECB) that everything will be done to shore up the member countries' financial institution, actual assistance has been tardy and measly in volume. Before monetary benefits can be enjoyed by the fiscally profligate EU countries, particularly Italy and Spain, fiscal consolidation and weaning away from debt have been stressed, almost as a pre-condition for bailout by ECB and the Financial Stabilisation Fund set up by EU for this purpose. While the easing of Euro zone crisis is still problematic, in America the downside risks to a rapid recovery of the economy are represented by looming brinkmanship over budget limits and tax policy between Obama administration and the Republicans which led to last year's government shutdown. Because of these downside risks steady growth in the American and EU economy cannot be taken for granted. Their economies still remain sluggish, compounded by the fact that the slowing down of their growth rates was more due to structural reasons rather than due to cyclical factors. Unless financial and fiscal reforms take full effects the developed economics are likely to grow more by fits and starts rather than steadily.
News on developments in the emerging economies is not too encouraging either. China, the powerhouse of the world economy in the last decade, has opted for a soft landing to give relief to its overheated economy. Instead of investment in infrastructure and manufacturing being the engine of growth which has been the case so far, the country has now shifted the gear to domestic consumption. This has been compounded by the paucity of loan available to industries in the private sector. With decreasing GDP (around 7.0 per cent) China is likely to reduce its standing as the major importer and exporter in global trade.
In addition to China, there are concerns about other emerging economies, too. These include large current account deficits in countries such as India, Turkey and Brazil, currency crises in some countries including Argentina, over investment in productive capacity and re-balancing economies to rely more on domestic consumption and less on exports. The flight of hot money that has followed after the 'tapering' by Fed has also started acting as a brake on some of the emerging economies.
Along with the above adverse developments, the emerging and persisting geo-political risks have also to be factored in estimating world trade growth. Conflicts in the Middle East, Asia and Ukraine could provoke higher energy prices and disrupt trade flows.
As regards the second determinant for expanding global trade, viz. elimination or reduction of trade barriers, nothing has happened since the WTO ministerial meeting in Bali to be optimistic and upbeat about a sudden spurt in world trade. At the ministerial meeting in Bali WTO members gave themselves until the end of this year to come up with a plan to move forward with the Doha agenda. Concerns have been expressed that the process may not be moving fast enough. There is no doubt that concluding the Doha Round would provide a strong foundation for growing world trade but so far it has remained a will-o-the-wisp. As regards the removal of red tape for trade facilitation, the first deal agreed in the history of WTO reached in Bali, nothing concrete has so far taken place to use it as a stimulant to world trade at present or in the near future.
The forecast made by WTO about rise in global trade this year points to prospects, at best. Prospects do not transform into reality if the underlying assumptions remain out of sync.
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