Session i k stephansen

Protectionism: A Discussion

AIG Global Economics Kathleen Stephansen Chief Economist March 10, 2014

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Protectionism: A discussion 1) Protectionism on the Rise?

2) The Rise in Global Trade 3) Current Trade Patterns 4) Global Supply Chains and Diffusion of Players in Global Trade 5) Economic Crisis and Global Trade: Trade Collapse and Rebound 6) Economic Crisis and Global Trade: Trade Slowdown 7) Global Trade Liberalization

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Protectionism on the Rise? --- MORE Protectionist Measures Data from WTO Trade Monitoring Database show a revival of restrictive trade measures. 116 new trade restrictive measures (19.3 per month) were identified for the 6 months ending mid-Nov 2013, up from 109 measures (15.6 per month) recorded for the previous seven-month period.

As tariffs are reduced or eliminated, more countries are invoking WTO trade remedies to assist domestic industries, in particular the initiation of anti-dumping investigations and more stringent customs procedures.

Number of Trade Restrictive Measures by Period and Type

Source: “Summary of WTO Report on G-20 Trade Measures (Mid-May 2013 to mid-November 2013)�, WTO 2013

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Rise in Global Trade World merchandise trade as a percentage of GDP has almost tripled since 1960, despite a post-crisis dip.

Source: World Bank / Haver Analytics

Average tariff rate fell for both high- and low-income countries, and there is no significant spike during global economic crisis.

Source: World Bank / Haver Analytics (2011 data missing) 4

Rise in Global Supply Chains and Diffusion of Players in Global Trade Lower trade barriers and technology-induced cost decline have facilitated the emergence of global supply chains. Foreign value-added (FVA) as a share of gross exports has almost doubled since 1970 to over 30%.

Source: “The Nature and Growth of Vertical Specialization in World Trade”, Hummels, Ishii, Yi 2001, "Changing Patterns of Global Trade“ IMF 2011

…DM tends to be upstream in the global supply chains, while EM tends to be downstream with relatively large shares of FVA.

Source: "Changing Patterns of Global Trade“ IMF 2011

…But EM economies have moved from peripheral to major players of global trade Exports as a Percent of World Trade (%)

… Growing trade interconnectedness increased the cross-border transmission of shocks through the trade channel.

----"Changing Patterns of Global Trade“ IMF 2011

Source: IMF DOT 5

Economic Crisis and Global Trade: Trade Collapse and Rebound Global trade used to contract and expand at a faster clip than GDP.

Source: Credit Suisse, CPB, Thomson Reuters DataStream, Haver Analytics

…Capital goods make up a large portion of world trade, but a much smaller share of world GDP, which consists mostly services. This asymmetry may explain half or more of the collapse in trade. ( “The Great Trade Collapse: Causes, Consequences and Prospects”, Baldwin 2009)

Source: World Bank/ Haver Analytics

Elasticity of exports to world income

… In addition, emergence of global supply chains and lean retailing significantly increases the elasticity of trade to global income from 1.74 to 3.35. East Asia, the region most integrated in global supply chains, registered the largest elasticity in the recent period, as well as the largest change in elasticity.

Source: “The Trade Response to Global Downturns: Historical Evidence”, Freud 2009 6

Economic Crisis and Global Trade: Trade Slowdown (1)

International trade used to enjoy a high beta relative to global GDP growth. Since 2011, that is less the case.

We attribute this to the cyclical change in DM demand. EU has been a drag on global demand since 2011, and US demand has so far focused on non-import-intensive consumer activities.

Source: Credit Suisse, CPB, Thomson Reuters DataStream, Haver Analytics

Traditional gross import measures overstate the impact of China on the rest of the world. After excluding those imports used for re-exports and capturing only those meeting final demand, EU and US stand out as the most important players in world trade.

Gross Imports as % Global GDP

Source: Credit Suisse, OECD-WTO TiVA database, IMF

Imports of Value Added as % Global GDP

Source: Credit Suisse, OECD, WTO 7

Economic Crisis and Global Trade: Trade Slowdown (2)

US imports (ex. Petroleum) have dropped by about 20% relative to trend line after crisis.

Source: Census Bureau, Thomson Reuters DataStream, Haver Analytics

In more detail, US demand has so far been concentrated in domestic-intensive and interest-sensitive consumer activities such as auto1 and residential investment. These two sectors are not terribly import intensive, limiting the beneficial spillover to EM export economies.

Source: BEA, BLS, Census Bureau, Haver Analytics 1. Autos are not as import intensive as they used to be, as foreign companies have shifted more production to North America. The share of domestic car sales of total car sales in the US has risen to near 80% from 70% in early 2009.

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Economic Crisis and Global Trade: Slowdown Temporary?

G3 demand vs. EM exports

Fcst.

Business fixed investment has been relatively anemic in DM due to the Great Recession. Nonetheless, depreciation and obsolescence should generate future above-forecast business capex. This pent-up DM demand should benefit EM given prevailing patterns of international trade.

Source: Credit Suisse, Thomson Reuters DataStream, Haver Analytics

EM structural changes as a headwind to growth vs.

DM cyclical rebound.

DM matters more to foster sustainable economic recovery.

Source: Markit Economics, Credit Suisse 9

The Slowdown in Chinese Demand and Its Effects on World Trade China Real GDP Growth has been slowing down...

Source: China NBS, Haver Analytics

‌While China’s impact on ROW was much smaller on value-added items, economies having relatively high export exposure to Chinese final domestic demand are vulnerable through trade linkage.

Source: Credit Suisse, OECD-WTO TiVA Database 10

Multilateral Trading System and Global Trade liberalization The multilateral trading system remains the best defense against protectionism and the strongest force for economic growth, sustainable recovery and development. (WTO, 2013)

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The Main Takeaways

1)

Protectionism is on the rise but the impact on growth is unclear

2)

The expansion in global trade has achieved a level of integration that is difficult to undo

3)

Fostering sustainable economic recovery in DM matters more

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