OpinionThe US-China trade war and Brexit are dealing body blows to already weak global trade

Stephen S. Roach says growing protectionism, increased tariffs and Brexit-induced disruption are all adding stress to the world trade cycle and could spark a sudden downturn from which no major economy will be spared

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Visitors watch a robot arm putting make-up on a mannequin at the first China International Import Expo in Shanghai on November 9. Weakening import demand in China could spell trouble for world trade. Photo: Xinhua

Published: 1:00am, 30 Jan 2019Updated: 3:39am, 30 Jan 2019

As the trade cycle turns, so goes the global economy. But there is a new twist. With growth in global trade sharply diminished since the 2008-2009 global financial crisis, an upsurge of protectionism, disrupting global supply chains, is all the more problematic. There is a distinct possibility a turn in an already weakened trade cycle could spark a surprisingly swift deterioration in the global economy.

Early hints of just such an outcome are evident in the January update of the International Monetary Fund’s World Economic Outlook. While the IMF has revised its world economic growth forecast for 2019 from 3.7 per cent to 3.5 per cent, its projection of global trade growth has barely budged from 4 per cent. This is certainly puzzling. In a climate of increased tariffs between the United States and China, with threats of more to come, and of Brexit-related risks to euro-zone trade, there is good reason to expect more significant downward revisions to the global trade outlook.

This would be especially problematic, given that global trade is already on shaky ground. Following a crisis-induced plunge of 12.2 per cent in the volume of global trade in 2009 – a modern-day record – recovery has been muted. After a brief two-year rebound in 2010-2011, world trade growth averaged just 3.6 per cent from 2012 to 2018 – about half the 7.1 per cent average annual pace in the 20 years before the crisis.

To be sure, the slowdown in world trade may be traceable to the global economy’s relatively weak post-crisis recovery. But the ratio of growth in global trade to growth in world output – an indicator that normalises different recovery trajectories – says otherwise. In the two prior expansions – 1985-1990 and 2002-2007 – this ratio averaged 1.6: in other words, once the cyclical noise of post-recession rebounds subsided, global trade grew about 60 per cent faster than world gross domestic product. By contrast, in the current expansion, the ratio has averaged just 1.0 over the comparable 2012-2018 period, with global trade growth having slowed to a pace only equal to world output growth.

Debate rages about why growth in global trade has slowed so sharply in recent years. Extensive research published by the IMF in late 2016 attributed the slowdown largely to subdued business capital spending, finding only small effects from protectionism. Yet the world has changed a lot in the subsequent two years. While the spending shortfall persists – despite a temporary increase from large corporate tax cuts in countries like the US – there has been a marked increase in protectionism, with attendant pressures on global supply chains. As a result, a rethinking of the IMF findings is in order.