It is well-known that world trade receives boost from a growing global economy. Favourable environment like free movement of goods and services is an additional favourable factor. In the nineties when globalisation took off, world trade was poised to expand. A brave new world of prosperity was seen just around the corner.
Indications have come from the World Trade Organisation (WTO) that a systemic shift might be underway and the trade expansion would no longer outstrip overall economic growth as it has done for decades. 'The rough two-to-one relationship that prevailed for many years between world trade growth and world GDP (gross domestic product) growth appears to have broken down', WTO has recently said. The organisation noted that 'the 2.8 per cent rise in world trade in 2014 barely exceeded the increase in world GDP for the year, and forecasts for trade growth in 2015 and 2016 only surpass expected output growth by a small margin'. According to WTO, the 2015 forecast was based on an assumption that global GDP would expand by nearly 3.0 per cent while the 2016 forecast depended on economic growth reaching over 3.0 per cent. The International Monetary Fund (IMF) has announced that it expects to see global growth at a modest 3.5 per cent this year and 3.8 per cent next year. WTO, meanwhile, has said developing countries were expected to see exports rise 3.6 per cent this year while their imports were to jump 3.7 per cent. It is apparent from this that globalisation of trade is not taking place at a uniform rate across the world. Different rates of growth of economies are leaving their footprint on world trade.
It is commonplace to say that for trade growth it is important to have certain favourable factors in the global economy. First and foremost is overall growth of the economies of the developed and emerging countries. If this growth is asymmetrical, world trade faces a strong impediment. Besides, there has to be financial stability and predictability. Geo-political conditions also have to be favourable. Finally, barriers to trade have to be minimum. All these factors are not right and adequately satisfactory at present. Europe and Japan are struggling with deflation and debt-overhang. China, the engine of growth for the world economy, has made soft landing with sluggish growth. Economies around the world are still struggling to fully recover from the 2008 financial crisis. The Doha Round of free trade under WTO has almost stalled. With conflicts flaring in places like Ukraine and the Middle-East the environment is less than ideal for global economic growth and trade. Global trade, in particular, is expanding more slowly than anticipated a year ago. The Ebola outbreak in West Africa, unusually harsh winter in America and collapsing world oil prices are also taking their toll. The situation has been exacerbated by strong exchange rate fluctuations. All of these developments have destabilising effects on world economy and trade.
WTO recently reported in a preliminary estimate that global trade had expanded just 2.8 per cent last year and was expected to rise only 3.3 per cent this year. A year ago the WTO was more optimistic. In April 2014 it had forecast world trade would expand 4.6 per cent in 2014 and 5.8 per cent this year. But it downgraded these predictions in September 2014 to 3.1 per cent and 4.00 per cent respectively. These have now been slashed down further.
'Trade growth has been disappointing in recent years due largely to sluggish growth in GDP in a large number of countries following the financial crisis', the WTO report has said. The organisation expects trade to continue its slow recovery. With economic growth still sluggish and continued geo-political turmoil this trend could easily be undermined, it is apprehended.
Last year was the third consecutive year in which trade grew less than 3.0 per cent, according to WTO. In fact, trade growth averaged just 2.4 per cent between 2012 and 2014. This has been the slowest rate on record for a three-year period when trade was expanding.
Trade growth is expected to pick up in 2016 with an expansion of 4.0 per cent. But it is quite possible that going forward trade growth might remain well below the annual average of 5.1 per cent since 1990. Under the circumstances, it is most likely that trade will continue its slow recovery.
There is a puzzle in the present state of the world economy that needs to be explained. Interest rates have been kept very low by central banks of the developed economies for about seven years. This was expected to encourage investment by allowing entrepreneurs to obtain money at low cost. But the protracted low interest rates resulted in continuing very slow growth of the industrial economies. The low interest rates have not encouraged greater expenditures in capital goods and consumer durables. This is because when low interest rates prevail for a long time it results in taking up poor projects and assets that do not increase production. The economies evolved to low interest rates and slow growth simultaneously. Until and unless interest rates begin to rise, asset bubbles will continue instead of promoting growth. Both the monetary and fiscal policies have to work in tandem to see an uptick in world economic growth. Promotion of world trade can happen only on the back of growing world economy. Trade facilitation as agreed under WTO auspices can give a boost to this process.
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