Mykyta vesselovsky

De-Globalization: Does That Word Mean What You Think it Means?

Presentation to 35 Annual Monetary & Trade Conference Mykyta Vesselovsky, Ph.D. Office of the Chief Economist Global Affairs Canada April 21, 2017

Real imports have seen a marked slowdown Monthly World Merchandise Imports, Volume Index Index (2010=100)

120

Compound average annual growth of 1.8% from 2011 to 2016

Compound average annual growth of 5.0% from 2000 to 2008

100

80

China enters WTO

Global Financial Crisis

Data: CPB World Trade Monitor Source: Office of the Chief Economist, Global Affairs Canada

Jan-2017

Jan-2016

Jan-2015

Jan-2014

Jan-2013

Jan-2012

Jan-2011

Jan-2010

Jan-2009

Jan-2008

Jan-2007

Jan-2006

Jan-2005

Jan-2004

Jan-2003

Jan-2002

Jan-2001

Jan-2000

60

2

Slowdown even more pronounced in advanced economies Volume of Exports in Advanced and Emerging Economies

Index (2010 = 100)

Emerging Markets: Compound Average Annual Growth of 2.2% from 2011 to 2016

140 120 100

Advanced Economies: Compound Average Annual Growth of 1.5% from 2011 to 2016

80 60

Data: CPB World Trade Monitor Source: Office of the Chief Economist, Global Affairs Canada

Jan-2017

Jan-2016

Jan-2015

Jan-2014

Jan-2013

Jan-2012

Jan-2011

Jan-2010

Jan-2009

Jan-2008

Jan-2007

Jan-2006

Jan-2005

Jan-2004

Jan-2003

Jan-2002

Jan-2001

Jan-2000

40

3

Poor performance in the EU and Japan are a drag on global trade, which should (hopefully) be cyclical phenomena Volume of Imports in EU, Japan and U.S.

Index (2000 = 100)

170 160 150 140 130 120 110 100

Data: CPB World Trade Monitor Source: Office of the Chief Economist, Global Affairs Canada

Jan-2017

Jan-2016

Jan-2015

Jan-2014

Jan-2013

Jan-2012

Jan-2011

Jan-2010

Jan-2009

Jan-2008

Jan-2007

Jan-2006

Jan-2005

Jan-2004

Jan-2003

Jan-2002

Jan-2001

Jan-2000

90

4

Changes in the composition of global demand could also be playing a role, but in the case of China is this cyclical or the new norm?

Real Fixed Investment Growth Percent

Different components of demand have different impacts on trade. In general, investment spending is the most importintensive component, followed by consumption, with government spending being the least import-intensive. During the post-crisis recovery, the investment component of aggregate demand has been fairly weak, while government spending has been relatively stronger.

30

Forecast

25 20 15 10 5 0 -5 -10 -15

2005-Q1 2006-Q1 2007-Q1 2008-Q1 2009-Q1 2010-Q1 2011-Q1 2012-Q1 2013-Q1 2014-Q1 2015-Q1 2016-Q1 2017-Q1 2018-Q1 2019-Q1

Changes in the composition of demand

35

(Annualized Q/Q percent change)

Data: IHS Global Insight Source: Office of the Chief Economist, Global Affairs Canada

5

Trade elasticity, the growth of trade in relation to GDP, has been decelerating since 2000

Percent

Elasticity of World Merchandise Trade Volume with Respect to World GDP at Market Exchange Rates (Over 10-year periods)

2.4 2.2 2.0 1.8 1.6 1.4

2000-2010

1995-2005

1990-2000

1985-1995

1980-1990

1.0

Source: WTO Data: WTO International Trade Statistics for trade, IMF World Economic Outlook database for GDP at market exchange rates Note: Elasticities calculated by regressing log of world merchandise trade volume on log of world GDP at market exchange rates over 10 years.

2004-2014

1.2

6

FDI, an important means for globalizing services Althoughhas global inward flows rebounded been flat FDI in recent years strongly in the past year, it has been on a flat trend since the recession‌

1,762 1,277

1,511

2012

1,427

1,567

2011

1,181

1,389

1,498

1,902 551

2003

688

590

2002

389

1996

482

342

400

1995

800

684

692

1200

950

1,076

1,359

1600

1,402

2000

1,520

Global Inward FDI Flows

US$ Billions

* Preliminary estimate Data: UNCTAD Source: Office of the Chief Economist, Global Affairs Canada

2016*

2015

2014

2013

2010

2009

2008

2007

2006

2005

2004

2001

2000

1999

1998

1997

0

7

FDI: greenfield and expansions far below their pre-crisis peak Total value of announced foreign investment projects globally (US$ Billion) $1,456

$851

$891

$988

$1,040 $928

$894 $734

$580 $615

$763

$711 $733

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Note: Estimated values on March 20, 2017, for all projects - excluding retail FDI Projects Data: FDI Markets, Financial Times.

Source: Office of the Chief Economist, Global Affairs Canada.

8

The maturity in GVCs is a key structural factor Percent

Share of Intermediate and Raw Goods* in Total Merchandise Exports

45

41% 40

35

30

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

33%

* Intermediate and raw goods as defined in UN Comtrade’s BEC classification Data: World Bank WITS Source: Office of the Chief Economist, Global Affairs Canada

9

The pace of trade liberalization agreements also slowed down

20 in 2009

6 in 2016

1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

20 18 16 14 12 10 8 6 4 2 0

Number of Regional Trade Agreements Entered into Force per Year*

* Only covers trade agreements notified to the WTO Data: WTO RTA Database Source: Office of the Chief Economist, Global Affairs Canada

From “2015 Rethinking Trade and Finance�

by International Chamber of Commerce

WHAT’S UP WITH CANADA EH?

11

The pace of Canada’s real exports is slightly below global Comparison of Canadian and World Export Volumes Index (Jan 2000 =100)

200 180 160 4.2%

140 120 100 80

3.9%

Data: CPB World Trade Monitor, Statistics Canada CANSIM table 228-0061 Source: Office of the Chief Economist, Global Affairs Canada

Jan-2016

Jan-2015

Jan-2014

Jan-2013

Jan-2012

Jan-2011

Jan-2010

Jan-2009

Jan-2008

Jan-2007

Jan-2006

Jan-2005

Jan-2004

Jan-2003

Jan-2002

Jan-2001

Jan-2000

60

12

This growth is broad-based

Percentage contribution

30

Sector Contribution to Gain in Canadian Export Volumes (2009 to 2016)

20

10

Electrical Equipment

Aerospace

Industrial Chemicals

Industrial Machinery

Metal ores and minerals

Data: Statistics Canada Source: Office of the Chief Economist, Global Affairs Canada

Agriculture

Forestry

Consumer Goods

Metals and Minerals

Energy

Automotive

0

‌but longer-term, trade is still below its peak share of the economy

Percent

Canada Trade Share of GDP

90 85

82.9

80 75 70

64.4

65 60 55 50 40

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

45

Data: Statistics Canada Source: Office of the Chief Economist, Global Affairs Canada

14

One bright spot is services Canadian Services Exports Billions $

110 100

90

$107 Billion in 2016, Equivalent to 21% of Goods Exports

80 70 60 50 40 30 10 0

$22 Billion in 1990, Equivalent to 14% of Goods Exports

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

20

Data: Statistics Canada Source: Office of the Chief Economist, Global Affairs Canada

15

So what does it all mean?  We understand “globalization” in the sense of expanding global value chains, relocation of production, rapid investment and urbanization outside the “developed world”  The data suggests that this process of globalization is over  The process of adjustment to it results, however, seems to be peaking  Economically, the worst thing to do at this point would be to run the truck back over the pedestrian in the road to “undo the damage” of globalization  But historically, this is almost unavoidable. “Fear is always a flawless compass / that leads us into trouble that’s worse”.

“The Battlefield of Trade” Keynes Smith

Keynes Ricardo

Martyn

Manoilescu Graham

Mill

The Reality

The arguments against trade are inconsistent 1. Jobs?

- taken seriously: jobs are upgraded by trade, not created. Employment is determined by macroeconomic conditions. Some industries become obsolete.

- in a period of globalization in the U.S. 1990 to 2000, imports rose at an average 12.1% per year while employment rose by an average of 1.8 million jobs per year and the unemployment rate fell from 5.6% to 4.0% 2. National security?

- haven’t heard this one in a while. But Musk returned space launch capacity to the U.S. and didn’t ask to be protected. Also, countries who trade with each other are less likely to go to war (google “the last Chinese warning to the U.S.”).

3. Infant industry?

4. Strategic protectionism – keep rocks in our harbours!

5. Unfair competition!!!

- trade is an excellent way to spread ideals, rules and prosperity

Challenges and opportunities  Rise in protectionism and isolationism is a growing concern internationally  but Canada will continue to carry the torch on trade liberalization both in international fora, such as the WTO, and in our bilateral relations.  The collapse of TPP marks a step back in trade liberalization and modernization  but, as a modern, ambitious and progressive agreement, CETA will set a new standard for 21st century free trade agreements.  Renegotiating NAFTA will be difficult in the present context  but it also provide an opportunity to modernize NAFTA and demonstrate that trade can be mutually beneficial.  We know that trade is good  but we must work harder to make the case for a more progressive approach to trade, and make trade work for people.

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