04 Feb 2016
" The attempt to grow exports at the expense of other countries, reminiscent of the beggar-thy-neighbour policies of the inter-war period, adds a new level of risk to global wellbeing."
Rodney Maddock, Adjunct Professor of Economics at Monash University
Has the slowdown arisen from an increase in protectionism and a closing of the world economy? Are the shared gains from open capital and good flows being put at risk as countries jostle for narrow advantage?
Secondly, will countries in the developing world which have pursued an export-led growth strategy now be forced to find another way to grow? Is it going to become harder for poor countries?
There is a temptation to use partial indicators of trade such as the sharp decline in the Baltic-dry index (of shipping) as harbingers of global recession. This can be very misleading: falls in the index have signalled eight of the last two recessions. It seems more fruitful to study the decline more carefully.
Why has trade growth slowed? The answer lies in three parts two boring, one interesting. Trade finance, of particular concern to banks, does not seem to have been an important contributor and trade in services seems to be powering along reasonably well.
Part of the answer is since trade is measured in value terms, the big decline in commodity prices has directly reduced the measured value of trade. These declines account for half the measured fall in trade growth. Oil alone explains about one-third.
Secondly, trade is measured in value terms not value-added terms. Much of the measured boost in trade flows pre-crisis was the result of the emergence of global supply chains which meant the same component would be included in measured trade flows each time it crossed a border.
There is a well-known study showing the factory gate price of an iPad in China is $A144 but only $A4 is Chinese value –added. The whole $A144 would enter the Chinese trade statistics. To the extent business models have already adapted, the stimulus to measured trade from this source will be slight.
By far the most interesting element of the slowdown has been a big trade reduction in capital goods. This in turn is explained by the low level of investment seen globally.
Most recent studies are finding overall trade growth is likely to pick up when global investment does. While this just seems like a fudge (resolving the trade conundrum with an investment conundrum), it does tell us worries about trade are not an independent source of concern.
So we have one thing to worry about not two.
What does this means for countries following an export-led growth strategy? We know well the stories of Japan, Korea and then China, each of which relied on exports as their main engine of growth.
The strategy worked because global trade increased three times as fast as global incomes in the post-war period.
Even now we have Japan actively in the process of trying to devalue the yen. Despite quantitative easing, negative interest rates and a currency which has fallen about 40 per cent against the $US since mid-2011, Japanese trade values have barely moved.
The IMF suggests Japanese trade is now some 20 per cent below where it should have been based on estimates from the pre-Abe period.
Part of the explanation lies with Japanese companies rebuilding profitability – they have only lowered their prices in other countries by about half the cut in the exchange rate. Nevertheless monetary policy is clearly directed at further devaluing the yen.
Japan is not alone in hoping to stimulate the domestic economy by relying on a boost from exports; Europe is in the same game, and even Australia is trying to jawbone the $A down.
With Japan, the Eurozone and China all trying to devalue, somebody's currency has to go up. All this makes it a testing time for the US which is losing competitiveness relative to these countries and will continue to do so. Protectionist politicians like Donald Trump and Bernie Sanders will find their cases strengthened as US exporters lose competitiveness and foreign imports rise as seems likely.
Developing economies will also be squeezed making their recovering more problematic. They have an additional problem since many of their businesses have large volumes of $US-denominated debt.
These will become much more expensive to service as the $US rises and their export earnings are squeezed by a combination of lower commodity prices and cheaper imports from the developed world.
Australia too, given our flexible exchange rates, may actually see the Trade Weighted Index rise slowing our export growth.
In summary, the decline in global trade is making adjustment difficult for many countries. Less trade means countries have to rely on domestic forces to stimulate their economies. Domestic investment remains the key.
The attempt to grow exports at the expense of other countries, reminiscent of the beggar-thy-neighbour policies of the inter-war period, adds a new level of risk to global wellbeing.
Dr Rodney Maddock is an Adjunct Professor of Economics at Monash University, Vice Chancellor's Fellow and Professor at Victoria University, President of the, Economic Society of Australia (Victorian Branch) and a director of CEDA.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
04 Feb 2016
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