October key indicator – has global trade peaked?

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had global trade peaked?In a report in November 2017 the WEF (World Economic Forum) analysed the future prospects for global trade suggesting that there will be a different kind of globalisation presenting different challenges.
In August this year in an article in the Evening Standard Paul Donovan, global chief economist of UBS Wealth Management, argued that global trade growth had stalled in the last few years and we had hit “peak trade”.
The earlier WEF report had concluded: “International trade of goods based on offshore manufacturing will obviously continue to exist, but it will tend to decline below world GDP growth.”
The most recent OECD (Organisation for Economic Co-operation and Development) analysis painted a similarly bleak picture in September predicting that escalating trade tensions, tightening financial conditions in emerging markets and political risks were contributing to a less positive outlook and “could further undermine strong and sustainable medium-term growth worldwide”.
In all the above the focus was primarily on the trade in goods around the world.
So, what are the key stresses that are leading to such a gloomy picture for global trade? They include trade wars and the imposition of tariffs, a rise in protectionism, the advent of IR 4.0, austerity and its effect on consumer confidence, global debt and concerns about the environment.
Let me take each of these in turn, albeit some can be grouped together.
Tariffs and trade wars: particularly those being introduced by US President Donald Trump on China and the EU as part of his stated purpose to “Make America Great again”. Unfortunately, this escalating tit for tat exchange is essentially a political response following a failure of negotiation. The approach is aimed at addressing the concerns of those parts of US industry that have been hard hit by “offshoring” manufacturing to places with the cheapest labour costs. The consequence is likely to end up with many goods becoming more expensive, not least due to rapidly rising labour costs in US.
This has particularly impacted on the industrial communities of the American Midwest, the mining and metallurgical areas of Liverpool and Manchester, and formerly industrialized, rural areas of France, according to the OECD.
Protectionism: Inevitably, political calculation is intertwined with tariffs and trade wars and it has been noticeable that there has been a rise in the popularity of protectionist, nationalist political parties, not only in the US but across the developed world in the EU, and beyond. The hope is that those communities hardest hit by globalisation and offshoring will be revived as manufacturing returns “home”.
IR 4.0: the advent of IR 4.0 (the fourth Industrial Revolution) is bringing in robotics and AI to replace workers. It will affect many aspects of national economies, reducing costs and making manufacturing closer to the point of sale cheaper. The consequence will be the loss of many low-skilled jobs although it has been argued that these will be replaced by the higher skills necessary to operate such technical equipment.  Paul Donovan argues that the politicians are therefore hopelessly out of date and are “leading cavalry charges across a battlefield of nuclear missiles”.
How we trade and what we trade are both changing, he argues, hence his thesis that as IR 4.0 makes supply chains shorter the world may well have hit peak trade in goods.
Austerity and consumer debt: ten years after the 2008 Great Recession began, many developed world countries, most notably the UK, are still trying to deal with the consequences and rein in public spending to an extent that has had a significant negative impact on both business and consumer confidence. This in turn has impacted on the investment and spending on which their economies depend. Greece, one of the hardest-hit countries, is still struggling, the Italian economy is not in the best of shape and the UK debt burden is reportedly still at 80% of GDP.
Environment:  there is also growing concern about the impact of relentless growth on the environment, focussing on global warming, natural resources, population growth, deforestation and so on. This will have an increasing impact on costs and consumer spending.
Global debt: there are already signs of stress in several developing world economies, most recently in Venezuela and Argentina but it is predicted that Turkey too will soon follow their lead in requesting aid from the IMF (International Monetary Fund).
The Guardian’s Philip Inman in an op-ed piece on September 26 suggested that the world’s poorest countries had “little protection against Trump’s trade wars and the growth slump”. He reports that Unctad (United Nations Conference on Trade and Development) has warned in its annual health check on the global economy that there has been a “dramatic increase” in developing world debts, attributing this largely to the behaviour of private corporations. This has resulted in a tripling of global debt in relation to GDP in the weaker economies since 2008 from 7% to 26%.

It’s not all doom and gloom for global trade

All of this may seem like a bleak picture, but there is some evidence that in fact the global centre of gravity is shifting and we are currently living through a transition period.
According to an analysis of the world economy by HSBC: by 2020 China will become the world’s largest economy and India will overtake Japan, Germany, the UK and France to become number three behind US.
To an extent, argued Hamish McCrae in the Independent last week, this will be driven by two major factors contributing to their growth: catch-up and frontier. Catch-up is where emerging economies such as China start to adopt and apply the technologies from the developed world, while frontier economies will improve the productivity of their predominantly younger work forces through education and innovation and nurturing entrepreneurial talent.