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The author heads the department of emerging markets economics at Citi.
As economists debate the scale and timing of the global recession, it is important to note that international trade is already experiencing significant strain. This could shake risk sentiment towards emerging economies.
According to Citi data, global import volumes have been in negative growth territory since late last year and continue to remain low in early 2023. It is unlikely that this trend will reverse anytime soon, and the hardest-hit will be trade-dependent economies, especially those in the developing world.
There are three key reasons why trade growth appears to be stagnant currently. Firstly, we are experiencing the aftermath of a surge in trade during the Covid-19 era. This surge was mainly driven by different economic responses to the pandemic. While liberal governments such as the US focused on fiscal transfers to support consumer purchasing power, China’s approach was to boost supply by getting workers back into factories. This disparity led to a significant spike in trade growth, similar to the post-2008 financial crisis recovery.
A second reason for the trade slump is the shift in expenditure from goods to services, especially in advanced economies. Consumers can only buy so many TVs and computers in a short period, and services are less tradeable.
Thirdly, China’s economic recovery is undermining trade growth. Since the recovery is mainly driven by private spending and lacks substantial stimulus measures, most of the increased spending is on services rather than investment spending that generates significant imports. Moreover, weak confidence in China has led to widespread bargain-hunting and consumption downgrading among Chinese households. Without substantial stimulus from Beijing, this pattern is unlikely to change.
Why is there little hope for improvement? Several factors contribute to this pessimism. Firstly, there is a deteriorating outlook for global demand, with projected global economic growth for this year at around 2.3%. Next year is expected to be weaker due to central banks aiming to induce slowdowns to control inflation. This slowdown will create a more challenging environment for trade. It is essential to note the severity of the global demand conditions we are entering. The last time we witnessed two consecutive years of sub-2.5% growth was after the financial crisis.
Another reason for the lack of optimism in trade is the world’s movement beyond “peak globalisation,” which has been suppressing global trade growth for over a decade. In the early 1980s, world exports accounted for 15% of global GDP, and this ratio increased to 25% around the time of the 2008 crisis. However, it has been steadily declining, reaching 20% in 2020 according to IMF data. Additionally, the rate of global trade growth has fallen below that of global GDP growth in the past decade, a trend unseen since World War II. This decline in integration compared to income growth disproportionately affects emerging economies that rely heavily on trade.
The World Trade Organization predicts that global trade growth will again fall below GDP growth in 2023 due to rising protectionism, geopolitical tensions, and the localization of supply chains. This could have long-term implications for developing countries trying to attract export-oriented industries. Previously, globalization offered the possibility of attracting capital and boosting exports to raise income levels. Unfortunately, these prospects seem grim now and in the foreseeable future, affecting developing countries that lack proximity to major markets like Mexico.
Regardless of one’s opinions on globalization, it provided hope for emerging economies to attract long-term capital and increase income levels through exports. However, the current outlook is disheartening, not just for the next year but beyond.
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