The Global Trade Slowdown and Secular Stagnation
Global trade volume plummeted 13 percent in 2009, many times the 2 percent decline in real GDP growth experienced in the depths of the Great Recession. While the trade collapse shocked economists, the slowdown in trade growth since 2011 has been an even bigger surprise. Real trade grew on average twice as fast as real GDP from 1990 to 2007, but since 2011 trade has grown at about the same pace as GDP. Most economists expected trade growth to slow as a result of lower income growth, but they presumed the relationship between trade growth and income growth would remain unchanged.
To put this change in context, if world trade volumes had grown according to IMF forecasts from September 2011, trade would be nearly 25 percent higher today. Of course, we now know IMF growth forecasts were overly optimistic. But even if trade had expanded at the traditional clip of twice the rate of economic growth, trade would be 15 percent higher today.
What Larry Summers has dubbed “secular stagnation” is critical to understanding the trade slowdown. Summers argues that too much saving and too little investment is a drag on growth in advanced countries. With interest rates near the zero lower bound, they cannot adjust to balance saving and investment, so the investment slump translates into foregone growth.
Trade is caught in the tempest because trade relies heavily on investment. Unlike GDP, which is 70 percent services, trade is 80 percent goods. The importance of investment is evident in the composition of trade: Machinery and transport equipment is 40 percent of merchandise trade. Bussière et al. (2013) show that sharp drops in investment across countries in 2009 explain on average about one third of the large declines in trade that year, as compared with only 4 percent for consumption. Put simply, imports fall especially sharply when investment declines.
Trade also works to transmit the investment slump across countries. Year-on-year growth in private investment in advanced countries was 2.1 percent 2010-2014, versus 3.3 percent during the pre-crisis period. As a result of slowing investment, advanced-country import demand fell. As exports from emerging markets slowed, investment in those countries also dropped. In the last couple of years, investment’s share of GDP has declined in Brazil, Russia, India and China.
Other explanations for the trade slowdown have been put forth, including a shortening of supply chains and increased protectionism. On the first point, although total trade in machinery and transport equipment has declined, the share of parts and accessories in this trade has increased slightly. This suggests that production techniques remain intact. Regarding the second argument, to the extent that government policy has distorted trade flows, it has tended to do so in export finance and subsidies, not protectionist measures.
If the trade slowdown is just a symptom, does it matter? Yes, because weak trade growth is promulgating the investment slump across countries. The decline in investment across wealthy nations led to a slowdown in emerging market exports, which transmitted the slowdown to developing states. The trade slowdown thus helps explain why emerging market investment opportunities have not closed the gap between savings and investment in advanced countries.
Supporting trade, for example through new liberalization initiatives, could reverse this process by creating opportunities for investment. From this perspective, the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership are especially timely. These mega-regional deals will create new business opportunities, lifting private investment. As trade expands, investment opportunities are likely to propagate around the region. While the trade slowdown is largely a symptom of secular stagnation, trade liberalization is part of the solution.
Readers may view Caroline Freund speaking on this topic here.