Slow trade growth will be the dominant feature of the world economy in the coming decade, not because of the latest tariff dispute between the US and China, but because of three longer-term trends, argue Ilaria Maselli and Ataman Ozyildirim.
Europe and America’s trade negotiators have a tense month ahead. If they fail to strike a deal by May 1, the US administration plans on lifting the steel and aluminum tariff exemptions it has temporarily granted Europe.
But amid the anxiety, something bigger remains overlooked: With or without tariffs, the recent uptick in trade growth looks unlikely to continue over the next few years.
As the global economy slows in the decade ahead, constrained by aging populations and weak productivity growth, slow trade growth will be the dominant feature of the world economy.
Lower volumes of imports and exports will be moving around the world because companies are increasingly sourcing their supplies and intermediate inputs locally. Businesses in mature economies on both sides of the Atlantic have started to shorten their supply chains considerably as of 2011, reversing the trend that characterised the previous two decades.
This is happening at the same time that three longer-term, trade-accelerating trends slow or level off.
First, in the mid-20th century the flow of goods across borders was accelerated because of major improvements in transportation. Advancements in containerised shipping and air freight led to shorter shipping times and cheaper costs. These efficiencies made it possible to rapidly ship components between factories across the world.
Without a doubt, improvements in transportation continue to this day and companies have started to utilise new technologies. But as of now, they are neither at the speed nor of the magnitude of those just a few decades ago.
Global trade in the 1990s and 2000s also made enormous gains because of advances in information and communications technologies. Until then, international business was fueled by faxes, telex machines, written correspondence, and expensive but sometimes unreliable telephone calls. But over the next decade, many of those communications were replaced by e-mail, transferable digital files, and inexpensive yet good-quality phone calls.
Fast forward to now: progress still continues but at a far more incremental pace.
And finally, in recent decades trade was propelled by the global integration of emerging economies – most notably China. This globalisation trend led to more low-cost production and new sources of revenue that simultaneously raised living standards and trade volumes.
But today, the speed by which those emerging market countries have been catching up to the most advanced economies has slowed considerably, reducing the impetus for trade growth.
With those three critical factors no longer fueling trade, the global economy poised to slow, and increasing public hostility towards globalisation and its effects, it is difficult to imagine that global trade will remain the signpost of a recovering global economy.
But the picture is by no means all doom and gloom for business. The international institutions and networks that promoted the creation of global value chains are still in place and functioning, and businesses should not over-react to the noise generated by big announcements.
Moreover, businesses should consider how new technologies such as additive manufacturing, robots, and artificial intelligence can help to source more inputs locally. This will become increasingly a more pragmatic solution than simply following the old patterns of offshoring to low-cost locations.
Early evidence suggests this is already occurring. In Germany, for example, Adidas is building a new fully automated shoe factory. And newspapers now highlight more and more stories of reshoring manufacturing production towards the US and Europe.
Looking ahead, trade will be slower with or without new tariffs. Even though trade growth will put on the brakes, businesses should support open trade on a level playing field that ensures fair rules for all sides.
Without a doubt, an existing, structural slowdown in global trade would only be exacerbated by a new round of protectionism and bring an earlier-than-necessary end to the recent cyclical pick up in global trade that began in mid-2016.
The larger trends in trade must be considered by industry and government leaders.