Global Trade: What's Behind the Slowdown?

Global Trade: What’s Behind the Slowdown?

Aqib Aslam, Emine Boz, Eugenio Cerutti, Marcos Poplawski-Ribeiro, and Petia Topalova with support from Ava Hong, Hao Jiang, Olivia Ma, Rachel 1 Szymanski, and Hong Yang.

Motivation World Real Trade and GDP Growth in Historical Perspective (Percent) 15

1. World

10 5 0 -5 Import growth

-10 -15

1960

65

70

75

80

GDP growth 85

90

Sources: IMF staff calculations.

Note: Imports include goods and services.

95

2000

05

10

15 2

Motivation World Real Trade and GDP Growth in Historical Perspective (Percent) 15

1. World

10 5 0 -5

Import growth Average GDP growth

-10 -15

1960

65

70

75

80

85

GDP growth

90

Sources: IMF staff calculations.

Note: Imports include goods and services.

95

2000

05

10

15 3

Motivation World Real Trade and GDP Growth in Historical Perspective (Percent) 15

1. World

10 5 0 -5

Import growth Average import growth

-10 -15

1960

65

70

75

80

85

GDP growth Average GDP growth 90

Sources: IMF staff calculations.

Note: Imports include goods and services.

95

2000

05

10

15 4

Motivation World Real Trade and GDP Growth in Historical Perspective (Percent) 15

1. World

10 5 0 -5

Import growth Average import growth

-10 -15

1960

65

70

75

80

85

GDP growth Average GDP growth 90

Sources: IMF staff calculations.

Note: Imports include goods and services.

95

2000

05

10

15 5

Outline • How widespread is the slowdown?

• What are its drivers?

• How much of the slowdown is a symptom of the weak recovery and shifts in the composition of economic activity?

• What role have other factors played?

• What are its policy implications?

6

HOW WIDESPREAD IS THE SLOWDOWN?

Slowdown in real trade growth is widespread across countries and products Average Real Import Growth (Percentage points; difference between 2003–07 less 2012– 15)

Distribution of Average Real Import Growth across Products (Percent)

2003–07

20

Density

15 10 5 0 -10

-5

0 5 Volume growth

10

15

20

0 5 Volume growth

10

15

20

2012–15

20

Density

15 10 5 0 -10

Sources: United Nations Comtrade; and IMF staff calculations.

-5

8

Services trade is more resilient than goods trade; among goods, capital goods slowed down the most.

World Real Goods and Services Import Growth

Real Goods Import Growth of Different Product Groups1 (Percent)

(Percent)

20

16 Goods

15

2012-2015

14

Services

12

10

10

5

8

0

6

-5

4 2

-10 -15 2003 04

2003-2007

0 Capital 05

06

07

08

09

10

11

12

13

14

15

Durable Processed Nondurable Primary intermediate consumption intermediate consumption

Sources: United Nations Comtrade; and IMF staff calculations.

1Computed using import volume indices constructed from quantity and value trade data at HS 6-digit level for 52 9 economies.

WHAT ARE ITS DRIVERS?

Research Design Role of Activity and its Composition

Empirical Estimation of Import Demand

Role of Other Factors

Multicountry, Multisector General Equilibrium Model

Empirical Analysis of Disaggregated Sectoral/Product Import Volumes 11

Research Design Role of Activity and its Composition

Empirical Estimation of Import Demand

Role of Other Factors

Multicountry, Multisector General Equilibrium Model

Empirical Analysis of Disaggregated Sectoral/Product Import Volumes 12

Actual import growth post-2012 is consistently lower than predicted by empirical import demand models‌ Actual and Predicted Evolution of Real Import Growth (Percent)

30

Predicted based on domestic and partner’s domestic import-intensity-adjusted demand Predicted based on import-intensity-adjusted demand Predicted based on domestic import-intensity-adjusted demand Actual 30 2. Real Services Imports: Full Sample 1. Real Goods Imports: Full Sample

20

20

10

10

0

0

-10

-10

-20 1985

90

95

2000

05

Source: IMF staff calculations.

10

-20 15 1985

90

95

2000

05

10

15 13

…but “missing” trade is small relative to total decline.

Difference between Actual and Predicted Growth of Real Goods Import (Percent)

Source: IMF staff calculations.

14

Three-fourths of the slowdown can be attributed to the weakness in domestic absorption.

Decomposing the Slowdown in Real Goods Import Growth (Percent)

Source: IMF staff calculations.

Note: Bar A decomposes the difference in average real goods import growth between the two periods into portions predicted by consumption and relative prices, investment, exports, and an un unpredicted residual. Bar B apportions the component predicted by exports into what can and cannot be predicted by domestic demand from trading partners, using an iterative procedure. Bar C decomposes the difference into the sum of domestic demand and external demand predicted by trading partners’ domestic demand.

15

Research Design Role of Activity and its Composition

Empirical Estimation of Import Demand

Role of Other Factors

Multicountry, Multisector General Equilibrium Model

Empirical Analysis of Disaggregated Sectoral/Product Import Volumes 16

Shifts in demand composition account for most of the slowdown but trade costs are important in EMDEs. Change in the Gross Growth of Nominal Imports-to-GDP Ratio between 2012-15 and 2003-07 (Percentage Points) Advanced Economies

Emerging Market and Developing Economies

Sources: Eora Multi-Region Input-Output database; United Nations Comtrade; and IMF staff calculations.

17

Role of Weak Recovery and Shifts in the Composition of Demand

• Import demand estimation and the structural general equilibrium model deliver consistent messages.

• Slowdown reflects largely, but not entirely, the weakness of the overall economic environment and compositional shifts in aggregate activity.

• Demand composition shifts played a larger role in the slowdown in AEs’ trade, relative to EMDEs. • There is a role for other factors, including trade costs.

Research Design Role of Activity and its Composition

Empirical Estimation of Import Demand

Role of Other Factors

Multicountry, Multisector General Equilibrium Model

Empirical Analysis of Disaggregated Sectoral/Product Import Volumes 19

Trade liberalization slowed down, and there are signs that protectionism is on the rise.

Tariffs in Advanced Economies (Percent; simple average)

Tariffs in Emerging Market and Developing Ec (Percent; simple average)

14 Start of Uruguay Round

12

45

Establishment of WTO

Start of Uruguay Round

40

Establishment of WTO

35 10 30 8

25

6

20 15

4

10 2 0 1980

5 85

90

95

2000

05

10

15

0 1980

85

90

95

2000

05

10

15

Sources: United Nations Conference on Trade and Development Trade Analysis and Information System; World 20 Trade Organization Tariff Download Facility; and IMF staff calculations.

Trade liberalization slowed down, and there are signs that protectionism is on the rise.

Free Trade Agreements by Year of Signature

Free Trade Agreements Coverage

(Number) 50

50

p

g

y

)

30 Average number of trading partners

40

40

25

Percent of global GDP(right scale) 20

30

30

15 20

20

10

10

5

0

0

0

1980

85

90

95

2000

05

10

15

10

1980

85

90

95

2000

05

10

Sources: Design of Trade Agreements database; World Trade Organization Regional Trade Agreements database; and IMF staff calculations.

15

21

Trade liberalization slowed down, and there are signs that protectionism is on the rise.

Temporary Trade Barriers

Measures Implemented

(Percent of products)

3.0

Antidumping Countervailing Duties Safeguards Temporary Trade Barriers

2.5 2.0 1.5 1.0 0.5 0.0 1990

95

2000

05

10

15

(Number of products, thousands) 10 Discriminatory Liberalizing Net Measures 8 6 4 2 0 -2 -4 -6 -8 -10 2009 10 11 12 13 14 15

Sources: Bown 2016; Global Trade Alert database; World Bank Temporary Trade Barriers database; and IMF 22 staff calculations.

Participation in global value chains plateaued.

The Evolution of Global Value Chain Participation

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Advanced Economies (Percent) Emerging Market and Developing Economies excluding China China

70 60 50 40 30 20

FVA (import perspective) = (foreign) value added that has been generated abroad and imported.

10 0 95 2000 05 10 13 Sources: Eora Multi-Region Input-Output database; and IMF staff calculations.

23

These factors are weighing on trade growth, although their quantitative contribution is limited.

Contribution of Trade Policies and Global Value Chains to the Slowdown in Real Goods Import Growth The slowdown in goods trade Trade policies and global supply is largely predicted by the (Percent) chain participation also played a weakness in the importintensive components of demand, such as investment.

(more limited) role in the slowdown.

0.0

0.0

-0.2

-1.0

-0.4

-2.0

-0.6 -0.8

-3.0

-1.0

-4.0

-1.2

-5.0

-1.4

-6.0

-1.6 -1.8

-7.0

Unexplained Unpredicted

Source: IMF staff calculations.

Predicted by IAD

Global value chain participation Trade policies

24

OUTLOOK AND POLICY IMPLICATIONS

What do our findings mean for the outlook for global trade?

• Slow global trade will likely persist in the medium term as long as global activity and investment remain weak.

• Even when activity gathers momentum, trade is unlikely to return to the growth rates seen before the financial crisis.

• Pre-crisis period was characterized by unusually high investment growth in EMDEs. • Global value chains developed rapidly.

26

Keeping the Wheels of Trade in Motion •

Policies to boost economic growth, especially investment, can also help trade recover.

•

But the role of trade policy should not be underestimated.

– Protectionist measures have contributed to the slowdown at the margin and should be avoided so as not to exacerbate the slowdown.

– Reviving trade liberalization process and reducing man-made trade costs will help.

•

The appropriate policy response to the decline in GVC growth is less clear-cut (“natural” or man-made)?

•

Policies must be accompanied by measures to mitigate the adjustment costs associated with greater trade integration.

– Benefits can be shared more widely and a stronger case can be made to an increasingly skeptical public.

27

Global Trade: What’s Behind the Slowdown?

Aqib Aslam, Emine Boz, Eugenio Cerutti, Marcos Poplawski-Ribeiro, and Petia Topalova with support from Ava Hong, Hao Jiang, Olivia Ma, Rachel 28 Szymanski, and Hong Yang.