Daily Times

Fear of and misunderstanding about free trade and globalisation brought us a turbulent 2016. And the last few months have been a wake-up call about the dramatic slowdown in international trade, presaging a major change in global policies. The World Trade Organization (WTO) has warned that world trade would only grow by 1.7 per cent (in volume) in 2016. This is its lowest growth since 2009, the year of the global financial crisis, when international trade started retreating. Worse still is the phenomenon of international trade growing at a slightly slower pace than global production. The ratio of international trade-to-GDP, which indicates the relative importance of international trade in the economy of a country, has been falling sharply since 2009 except a slight recovery in 2010-2011.

According to the October 2016 IMF World Economic Outlook, international trade in goods and services has grown at the mediocre rate of around 3 per cent a year since 2012, less than half of the growth of the previous three decades. Between 1985 and 2007, world trade increased, on average, twice as fast as world production, whereas for the past four years it has just kept pace.

This is an historic change. If the WTO forecast for 2016 were to be confirmed, world trade would have risen less rapidly than world GDP, which grew between 2.2 per cent and 2.9 per cent in the first half of 2016.

This could indeed be evidence for the beginning of globalisation going in reverse. The globalisation of trade means that countries trade more with each other, and that trade between them increases faster than their national production. Has globalisation, which is the modern form of the international division of labour, reached its peak? Those good old times when companies, mainly multinationals, achieve production efficiency and generated more revenue through outsourcing work abroad than manufacturing at home.

The IMF suggests three explanations for the decline in trade regimes: the slowdown in global economic growth; halt in trade and investment liberalisation agreements (which started long before the freezing of the Trans Pacific Partnership or the Trans Atlantic Trade and Partnership agreements); and maturity of international production chains that have exhausted their advantages.

Geopolitical competition in global trade agenda-setting among the US, the European Union and emerging powers, such as China and India, and increasingly popular protectionism rhetoric in national trade debates also explain the failure or lack of cooperation in the multilateral trading system.

IMF experts estimate that the slowdown in economic growth since 2012 explains by itself “about three-quarters of the dramatic slowdown trade”. Proof of this, it argues, is that investment products, and durable household goods, such as cars, whose trade has slowed down the most. They note that slowdown of goods consumption affects 143 countries out of 171 under review, including China, Brazil and the nations in the Euro area, among others.