Cardiac Arrest or Dizzy Spell:Why is World Trade So Weak,What Can Policy Do About It?

PARIS, 21 September 2016

www.oecd.org/economy/economicoutlook.htmECOSCOPE blog: oecdecoscope.wordpress.com

2

World trade growth has slowed to abnormally low rates since the crisis

World trade growth % per annum

1. Average annual percentage growth.2. Annualised quarter-on-quarter percentage growth. 3. Source: OECD Economic Outlook Database 99, OECD calculations.

3

Viewed over a longer horizon, global trade intensity has stalled

World trade intensity

Note: Both world trade and GDP are measured at market exchange rates in constant 2010 US dollars. Trade intensity is measured as the ratio of imports plus exports to GDP.Source: OECD Economic Outlook Database 99, June 2016.

2015 = 0.2%, 2016 negative?

4

Cyclical factors behind the weakness

1. Depressed demand, following the financial crisis

2. Weak investment, a trade intensive component of demand

3. Euro area weakness, a trade-intensive region

5

Trade intensity usually falls after downturns…

Source: Ollivaud and Schwellnus (2015), “Does the Post-Crisis Weakness of Global Trade Solely Reflect Weak Demand?”, OECD Economics Department Working Papers, No. 1216.

Ratio of real trade to real GDP growth, market exchange rates

6

… and investment, which is trade intensive, has been particularly weak

Ratio of global investment to GDP index 2007=100

Source: OECD Economic Outlook Database No. 99; Ollivaud and Schwellnus (2015).

7

In the years after the crisis, weakness in the Euro Area contributed much of the slowdown

Ratio of Global import volume to global GDP volume index 2007=100

Source: OECD Economic Outlook 98 database; and OECD calculations.

The recession and sluggish recovery in the euro area dragged down global growth as these countries trade heavily, mostly with each other

8

Structural factors have also contributed to the trade slowdown

1. Rapid growth in Gross Value Chains has plateaued and shows signs of reversing

2. China’s trade growth is slowing due to structural change

3. Trade liberalisation has slowed and there are signs of creeping protectionism

9

A Global Value Chains indicator

• Measures of Global Value Chains, such as OECD TiVA, aim to capture where value-added is creating trade, looking through imports of intermediate goods and services.

• As OECD TiVA data are currently only available to 2011, an indicator of GVC activity is used as a proxy to shed light on more up-to-date developments.

• This indicator is the ratio of intermediate imports of goods to final domestic demand.

• As commodity price movements and the cycle can influence this measure of GVCs, a structural GVC indicator is estimated to remove these effects.

10

Global value chains appear to be unwinding

GVC indicator average annual percentage change

Having deepened over the past 20 years, a reversal in trade integration through GVCs would be worrying

11

GVCs appear to be unravelling or slowing across Asia

Note: Structural Indicator adjusted for price and cyclical effects.Source: Author calculations.

Structural GVC Indicators average annual percentage change

12

…as well as North America and Europe

Note: Structural Indicator adjusted for price and cyclical effects.Source: Author calculations.

Structural GVC Indicators average annual percentage change

13

China’s share of world trade has been growing rapidly

Source: OECD Economic Outlook Database 99, June 2016.

China’s share of world trade volume

14

But China is also under-going structural change which affects trade

Source: Chinese customs.

Growth in China has slowed in recent years

The economy is rebalancing towards less-trade intensive consumption and services

China is doing less assembling and producing more domestically for its final consumption

15

The exceptional trade weakness in 2015 was centred in China

Source: OECD Economic Outlook Database 99, June 2016

Export and import volumes in 2015 percentage change

China, trade volumes, goods and services, annual 5 years change

16

This has had a wider impact on the“Asian Trade Machine”

Export-to-GDP ratio in volume index 2007=100

Source: OECD Economic Outlook Database 99, June 2016.

17

Overall, much of the weakness may be structural and linked to China and GVCs

Note: World trade and world GDP measured at market exchange rates.Source: OECD June 2016 Economic Outlook database; Fraser Institute; and OECD calculations.

Change in contributions to trade intensityImpact of different factors on the ratio of exports plus imports to world GDP, % pts

18

Trade policy shows signs of unravelling, but could contribute

to better outcomes

19

The pace of trade liberalisation has slowed and even reversed

GATT/ WTO Rounds, NAFTA, EU Single Market

Rising protectionism…

Note: Variables 4A and 4B of the Economic Freedom of the World Index measuring tariff and non-tariff barriers. A global measure is constructed for the purposes of this paper from the individual country series using GDP weights. The index ranges from 0 to 10 and a higher value indicates a more liberal policy.Source: Fraser Institute for Economic Freedom and OECD calculations.

The pace of new measures to open markets has slowed

20

The number of trade restrictions has risen sharply since 2012

Source: WTO-OECD-UNCTAD 2016 G20 Trade Policy Monitoring Report.

Number of discriminatory trade related measures in-force since the crisis

While the post-crisis trade backlash has been less severe than some anticipated, trade restrictions have increased

This deterioration comes despite “stand still” commitments by the G20

21

Structural reform priorities to boost trade and deepen global value chains

Stop new protectionist measures and rollback existing ones

Implement agreements already reached (Trade Facilitation and Trans-Pacific Partnership)

Revive multilateral negotiations on new issues such as digital trade

Liberalise further FDIs

Conclude on-going sectorial negotiations in services

22

Boosting trade would raise growth

Note: Economic Freedom of the World Index global measure constructed using GDP weights. Source: Fraser Institute; and OECD calculations.

Avoid new trade and investment protectionist measures• Improving border and customs procedures, incl.

implementing the trade facilitation agreement• Removing tariff and non-tariff barriers at borders• Remove regulatory restrictions on trade in services, in

particular logistics• Reduce costly regulatory differences between countriesRollback protectionist measures introduced following the crisis

Reduce unnecessary trade costs by:

Remove impediments and distortions for cross border investment

Trade policy recommendations:Global index of trade liberalisation

23

Removing trade restrictions would allow trade intensity to rise again

World trade intensity

Note: Trade intensity is measured as the ratio of imports plus exports to GDP.Baseline projection involves a modest increase in trade intensity as income convergence implies some increase in trade intensity. Alternative scenario involves all countries implementing the trade policies of the most liberal country.

24

Especially via multilateral deals

Increase in trade intensity from trade liberalisationpercentage point increase 2017 to 2060

Source: Authors' calculations based on estimates in a panel model of world trade intensity.

25

Raising trade intensity would also boost productivity

World trade intensity and OECD productivity growth

Note: In the baseline scenario trade intensity remains constant at its 2016 level. In the policy scenario trade intensity increases by 1.3 percentage points per annum (average from 1986-2007) from 2017. The effect of the change in trade intensity on productivity is calculated using estimates from Egert and Gal (2016).Source: Economic Outlook Database 99, Egert and Gal (2016), author calculations.

26

Public support requires gains to be sharedand policy packages to be deployed

Source: Pew Research Center.

People in advanced economies are more negative about globalisation

Views on trade and foreign investment, 2014

Investing in human capital and infrastructure

Active labour market policies to promote skills upgrading and matching

Social protection and support for workers in transition

Product market reforms to promote competition and firm entry

Trade policies should be accompanied by: