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By Otaviano Canuto
Figure 1: World Merchandise Trade Volume
Source: Netherlands Bureau of Economic Policy, World Trade Monitor,
December 2015.
What Happened to World Trade?
To what extent have recent
developments in global
trade been cyclical or
structural?
World trade suered another disappointing
year in 2015, experiencing a contraction
in merchandise trade volumes during the
rst half and only a low recovery during
the second half. (Figure 1). While last year’s
trade performance can be associated to
the on-going growth transition in China
and its reections on other non-advanced
economies – see Constantinescu et al, Trade
Turbulence, F&D, March 2016 – the fact
is that last year’s performance came aer a
period since the 2000s in which world trade
volumes have lagged behind GDP growth, a
trend accentuated since the onset of the global
nancial crisis and in sharp contrast to global
trade increases at a higher pace than world
GDP prior to the new millennium.
Summary
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Policy Brief June 2016
PB-16/15
2015 was the worst year for world trade since the aermath of the global nancial crisis, with gures exhibiting a
decline of almost 14% in dollar value terms. In fact, world trade volumes have lagged behind GDP growth since the
2000s, a trend accentuated since the onset of the global nancial crisis, whereas global trade increases took place at
a higher pace than world GDP prior to the new millennium. Although some transitional – and therefore potentially
reversible – explaining factors may be pointed out, some structural trends have also been at play. Given that trade
has been a key driver of global growth, income convergence, and poverty reduction, concerns have been raised over
whether the current directions of world trade lead towards a lesser development-boosting potential.
2
Economists have indicated some circumstantial factors
to explain this post-GFC pattern (Dadush, 2015) (Didier
et, 2015, p. 18). For instance.
«World GDP and trade figures would be
reflecting the fact that the highly open-trade
countries of the Eurozone have had a sub-
par growth performance relative to the rest
of the world.»
Furthermore, the weak recovery of xed investments in
advanced economies - Canuto (2014a) - has suppressed
an important source of trade volume, given the higher-
than-average cross-border exchanges that characterize
such goods.
More disputed hypotheses have also been argued. More
stringent capital requirements and nancial regulations
might be curbing the availability of trade nance.
Additionally, rising “murky” trade-restrictive tax-cum-
subsidy policy measures adopted in some key sectors by
some countries may also have become more signicant
than usually perceived (Global Trade Alert 18, 2015).
While those post-crisis factors have certainly played a
role, some structural trends seem also to be at play. As
suggested by Figure 2, aer steadily increasing between
the mid-1980s and the mid-2000s, the trade elasticity
to GDP has lost steam (though it remained above one,
thus implying that trade was still rising faster than GDP).
Aer jumping in previous decades, the world’s exports-
to-GDP ratio seems to have started to approach some
plateau (or a “peak trade”). Since 2008, world trade has
been rising slower than GDP at around 0.8:1, leading to a
fall in the share of exports in global GDP. However, even
if post-GFC factors were partially reversed, the presence
of a long-term trajectory of trade elasticity displaying
a slowdown already prior to the recent pattern would
suggest no automatic return to the heyday.
OCP Policy Center Policy Brief
Figure 2: Trade-income elasticity and Exports-GDP ratio - global economy
Source. Escaith and Miroudot, ch. 7 in Hoekman (2015).
Notes: Merchandise exports only; world GDP and trade at constant 2005 prices; dollar gures for GDP are converted from
domestic currencies using ocial exchange rates. Long-term elasticity is based on 10-year rolling period from 1960-1970 to 2005-
2015 (2015 is based on forecasts).
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OCP Policy Center Policy Brief
Hoekman (2015) brings a thorough examination of
both “cyclical” (post-GFC) and “structural” hypotheses
about the global trade slowdown. Regardless of the
weight attributed to these factors in explaining recent
developments, three processes stand out as relevant for
the purpose of analyzing what lies ahead in terms of the
link between global trade and development. Two of them
were “transitional” - in the sense that they were “one shot”
- the unfolding of which underpinned the extraordinary
ascent of the global export-GDP ratio. e third one has
evolved more gradually and will likely carry a signicant
transformative role ahead.
A major wave of vertical and
spatial fragmentation of
production has passed
e period from the mid-1980s to the mid-2000s was
peculiar in several aspects. For one, these decades
featured a process of economic reforms that aimed to
remove barriers to trade, a multilateral trading system
that reduced uncertainty for traders, and technological
advances that reduced trade and communications costs.
Combined, these trends ushered in years of sustained
trade expansion.
«Average tariffs moved to well below ten
percent, and in many countries a significant
share of trade became duty-free.»
Advances in transport (such as containerized shipping)
and information and communications technologies
greatly reduced the cost of shipping goods and of
managing complex production networks. Together these
developments led to two major changes in the structure
of global trade: (a) the vertical and spatial cross-border
fragmentation of manufacturing into highly integrated
“global production networks” or “global value chains”
(GVCs); and (b) (to a lesser extent) the rise of services
trade (Canuto, Dutz & Reis, ch. 3 in Canuto & Giugale,
2010) (Canuto, 2012).
e full establishment of cross-border GVCs intrinsically
raises trade measured as gross ows of exports and
imports relative to GDP, a value-added measure, because
of “double counting” of the former - although the ratio of
trade to GDP still increases even when trade is measured
on a value-added basis (Canuto, 2013a). Given the then-
prevailing technological state of arts in production
processes, the policy and enabling-technology
breakthroughs above mentioned sparked a powerful
cycle of fragmentation, especially in manufacturing, with
a corresponding cross-border spread of GVCs.
e re-shaping of the economic geography might have
kept the pace with global trade impacts via further
dislocation of fragments of GVCs, depending on the
evolution of country locational attributes. Technological
changes might also have altered optimal spatial
congurations of the various manufacturing activities,
as well as extended fragmentation to other sectors. is
may well be the case ahead, as technologies and country
policies keep evolving – some analysts point to a greater
reliance on regional production networks, while others
refer even to a potential reversal of GVCs because of 3D
printing (“additive manufacturing”) (see references in the
introduction of Hoekman (2015)).
«However, the wave of cross-border
manufacturing fragmentation of mid-1980s
through the mid-2000s was particularly
intense and time-concentrated.»
Figure 3 - from Constantinescu et al (2015) - shows that
the ratio of foreign value added to domestic value added
in world gross exports increased by 2.5 percentage points
from 2005 to 2012, aer having risen by 8.4 percentage
points from 1995 to 2005.
Figure 3: Ratio of Foreign Value Added to Domestic Value
Added in World Gross Exports (%)
Source: Constantinescu et al (2015).
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OCP Policy Center Policy Brief
A major wave of trade-cum-
structural-transformation has
passed – with China as a special
case
e wave of fragmentation of manufacturing activity
beneted from the incorporation of large swaths of lower-
wage workers from Asia and Eastern Europe into the
global market economy (Canuto, 2015a). Conversely, the
former facilitated a process of growth-cum-structural-
transformation with substantial total factor productivity
increases in these countries via transfer of population
from low-value, low-productivity activities to the
production of modern tradable goods, for which foreign
trade was instrumental – with China as a special case
both in terms of speed and magnitude (Canuto, 2013b)
((Gautier et al, ch. 5 in Hockman (2015)).
e transitional nature of such a li of world trade relative
to world real GDP, even as the latter grew substantially,
stemmed from the inevitable tendency of both starting
to rise more in line once the intense transformation
approached completion. Its extraordinary intensity also
reected a peculiar – and transitory – combination of
ultra-high investments-to-GDP and trade-surplus-to-
GDP ratios in China with large current-account decits
of the U.S. (Canuto, 2009).
Figure 4: China's Share of Imports of Parts and Components in Exports of Merchandise
Source: (Constantinescu et al, ch. 2 in Hoekman (2015)
More recently, China has initiated a rebalancing toward a
new growth pattern, one in which domestic consumption
is to rise relative to investments and exports, while a drive
toward consolidating local insertion in GVCs to move
up the ladder of value added is also to take place. at
rebalancing has been pointed out as one of the factors
behind the recent global trade slowdown, given China’s
weight in the world economy and a recent trend of
“import substitution” as illustrated in Figure 4.
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OCP Policy Center Policy Brief
Figure 5: Global Manufacturing
Source: Institute of International Finance, "e rise of services - what it means for
the global economy", December 15, 2015.
Figure 6: Employment in Services
Source: Institute of International Finance, "e rise of services - what it means for
the global economy", December 15, 2015.
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OCP Policy Center Policy Brief
Advanced countries are becoming
services economies
While both the GVCs’ rise and growth-cum-structural-
transformation – especially in China – were taking
place, with corresponding impacts on the landscape of
foreign trade, advanced – or mature market - economies
maintained a steady evolution toward becoming services
economies – a trend maintained aer the GFC. Lower
GDP shares of the value added in manufacturing have
accompanied rising shares of employment in services
(Figures 5 and 6).
Both supply and demand factors explain such trends in
advanced economies. On the supply side, beyond the
higher pace of increases of productivity in manufacturing
than in services (with correspondingly dierent rhythms
of reduction in labor requisites), not only did the relative
prices of manufactured goods fall, but a substantial part
of local production was also o-shored as a result of
GVCs and the incorporation of cheaper labor from areas
previously out of the market economy world. On the
demand side, one may point out both a higher income-
elasticity of demand for services – reinforced by aging
of the population – and to technology trends favoring
“soware” vis-à¬-vis “hardware” – or “intangible” relative
to “tangible” assets – as leading to an increasing weight of
services in GDP and employment (IIF, 2015).
ose evolutionary features of supply and demand
would also be valid for emerging market and developing
countries – even if, as suggested in the upper half of Figure
5, they were partially mitigated in China and other Asia/
Pacic countries by sucking manufacturing activities
from other emerging market and developing economies.
«In any case, given the state of current
technological trajectories, rising shares
of services throughout would imply an
anti-trade bias, given a still higher trade-
propensity of manufacturing.»
IIF (2015) goes as far as to argue that this has already
brought consequences for the global business cycle,
rendering it less inuenced by swings in manufacturing
output, with shock transmission from advanced
economies increasingly taking place via trade of services
among themselves and more weakly to manufacturing-
dependent emerging market and developing economies.
is would be one of the factors behind the abrupt decline
of the world trade elasticity and of the recent decoupling
of growth between recovering advanced and decelerating
emerging economies.
Has the window of opportunity of
developing via trade integration
narrowed?
World trade may well live through a new era of rise
relative to GDP (Hoekman's introduction in Hoekman
(2015)): on-going technological trajectories may deepen
the fragmentation and increase the tradability of services;
new vintage trade agreements – including possible TPP
and TTIP (Canuto, 2015b) – are giving special attention
to restrictions on trade of services. In fact, the content
of services in current foreign trade transactions has
already been higher than what gross trade gures display
(Canuto, 2014b).
Another question is what lies ahead in terms of growth
opportunities for non-advanced economies through
foreign trade given the evolution of the latter along the
lines here described, one in which the factors that led to
the “peak trade” seem to have exhausted, at least in the
near future ahead.
«Trade has been a key driver of global
growth, income convergence, and poverty
reduction.»
Both developing countries and emerging market
economies have beneted from opportunities to transfer
technology from abroad and to undergo domestic
structural transformation via trade integration in the
last decades. One may thus understand why there has
been some concern over whether the current pace
and direction of world trade lead towards a lesser
development-boosting potential.
e nature and height of domestic policy challenges have
changed substantially in a three-fold way:
First, China is in a league of its own and its rebalancing-
cum-upgrading will condition other emerging market
and developing economies. If it lets low-skill labor-
intensive manufacturing activities go, a new wave of
further GVC dislocations may open opportunities for
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OCP Policy Center Policy Brief
countries currently endowed with cheap and abundant
labor. On the other hand, its densication of local parts of
GVCs will represent a competitive challenge to medium-
range manufactures produced in other middle-income
countries. e net result will also depend on the leakages
outward of its domestic demand as it rebalances toward a
more consumption- and service-oriented economy.
Second, the directions taken by technological trajectories
and aggregate demand in advanced economies seem to
point toward a broad alteration of the balance of locational
advantages for production fragments, decreasing the
weight of labor costs and augmenting the relevance of
local availability of other complementary intangible
assets. A “double whammy” on production and exports
of non-advanced economies may take place: a partial
reversal of o-shoring and a slower growth of outlets for
their typical exports.
ird, the bar, in terms of what it takes to countervail
that double whammy (improvements of the local
business environment and transaction costs, quality of
economic governance and other conditions favorable
to accumulation of intangible assets) has been raised.
Nonetheless, provided that such bar is reached, the
local provision of – embodied or disembodied - services
complementary to those produced or used in advanced
economies may ourish. is will be the case, e.g. of
natural resource-rich countries that manage to develop
related intangible assets in terms of applied-science
capabilities.
e run-up to “peak trade” was one of primarily exploring
complementarities within GVCs to substitute for existing
producers. e post-peak trade era may well be one of
building complementarities.
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About the author, Otaviano
Canuto
Otaviano Canuto is the executive director at the Board
of the International Monetary Fund (IMF) for Brazil,
Cabo Verde, Dominican Republic, Ecuador, Guyana,
Haiti, Nicaragua, Panama, Suriname, Timor Leste and
Trinidad and Tobago. He is also a non-resident fellow at
the OCP Policy Center. e views expressed here are his
own and do not necessarily reect those of the IMF or
any of the governments he represents.
Dr. Canuto has previously served as vice president,
executive director and senior adviser on BRICS
economies at the World Bank, as well as vice president
at the Inter-American Development Bank. He has also
served at the Government of Brazil where he was state
secretary for international aairs at the ministry of
nance. He has also an extensive academic background,
serving as professor of economics at the University of
São Paulo and University of Campinas (UNICAMP) in
Brazil.
About OCP Policy Center
OCP Policy Center is a Moroccan think tank whose
mission is to promote knowledge sharing and
contribute to enhanced thought on economic issues and
international relations. rough a Southern perspective
on critical issues and major regional and global strategic
issues faced by developing and emerging countries,
OCP Policy Center provides a veritable value added and
seeks to signicantly contribute to strategic decision-
making through its four research programs: Agriculture,
Environment and Food Security; Economic and Social
Development; Conservation of Raw Materials and
Finance; and Geopolitics and International Relations.
OCP Policy Center
Ryad Business Center – South, 4th Floor – Mahaj Erryad - Rabat, Morocco
Email : contact@ocppc.ma / Phone : +212 5 37 27 08 60 / Fax : +212 5 37 71 31 54
Website: www.ocppc.ma
OCP Policy Center Policy Brief
The views expressed in this publication are the views of the author.