Global trade volumes are set to rebound from their poor performance last year, according to the World Trade Organisations – but only if the global economy recovers as forecast, and governments don’t undermine trade growth through protectionist policies.

The WTO’s central forecast is for trade growth of 2.4% this year, compared to just 1.3% last year. However the organisation warns there is "considerable uncertainty" around the forecast, and says growth could be in a range between 1.8% and 3.6%. In 2018 this range is from 2.1% to 4%.

The unpredictable direction of the global economy in the near term and the lack of clarity about government action on monetary, fiscal and trade policies raises the risk that trade activity will be stifled. A spike in inflation leading to higher interest rates, tighter fiscal policies and the imposition of measures to curtail trade could all undermine higher trade growth over the next two years.

In 2016, the weak trade growth of just 1.3% was partly due to cyclical factors as economic activity slowed across the board, but it also reflected deeper structural changes in the relationship between trade and economic output. The most trade-intensive components of global demand were particularly weak last year as investment spending slumped in the United States and as China continued to rebalance its economy away from investment and toward consumption, dampening import demand.

Europe enjoyed a good year in 2016, with imports and exports growing at a stronger rate than North America, where growth rates have been flat since 2015.  Indeed North America was one of the biggest contributors to global weakness last year, contributing just 0.1% to global import growth

Rank

EXPORTERS

Value $bn

Global Share

1

China

2098

16.8%

2

EU-28 (External)

1932

15.4%

3

USA

1455

11.6%

Rank

IMPORTERS

Value $bn

Global Share

1

USA

2251

17.6%

2

EU-28 (External)

1889

14.8%

3

China

1587

12.4%

Global economic growth has been unbalanced since the financial crisis, but for the first time in several years all regions of the world economy should experience a synchronised upturn in 2017. This could reinforce growth and provide an additional boost to trade.

"Weak international trade growth in the last few years largely reflects continuing weakness in the global economy, said WTO director general Roberto Azevêdo.

However in a thinly disguised swipe at the Trump administrations he said: "Trade has the potential to strengthen global growth if the movement of goods and supply of services across borders remains largely unfettered. However, if policymakers attempt to address job losses at home with severe restrictions on imports, trade cannot help boost growth and may even constitute a drag on the recovery."

"Although trade does cause some economic dislocation in certain communities, its adverse effects should not be overstated – nor should they obscure its benefits in terms of growth, development and job creation. We should see trade as part of the solution to economic difficulties, not part of the problem.

"In fact, innovation, automation and new technologies are responsible for roughly 80% of the manufacturing jobs that have been lost and no one questions that technological advances benefit most people most of the time. The answer is therefore to pursue policies that reap the benefits from trade, while also applying horizontal solutions to unemployment which embraces better education and training and social programmes that can quickly help get workers back on their feet and ready to compete for the jobs of the future," he said.

Despite positive growth in its exports and imports, North America was one of the biggest contributors to the weakness of world imports in 2016. This is illustrated by Chart 5, which shows regional contributions to world trade volume growth. In 2015, North American imports added 1.2 percentage points to world import growth of 2.9%, or 42% of the total increase.

By contrast, the region only contributed 0.1 percentage points to world import growth of 1.2% last year. Asia and Europe were the only regions making significant positive contributions to global import demand in 2016, with Europe contributing 1.6 percentage points (39% of the total increase) and Asia adding 1.9 percentage points (49% of the total).

Reasons for the lacklustre performance of North America’s trade are multi-faceted, but they include low oil prices and declining rates of investment, particularly in the energy sector. Investment made essentially no positive contribution to GDP growth in the United States in 2016 (see Appendix Chart 1).

According to the WTO, investment is the most import intensive component of GDP and has been particularly weak in developed countries since the financial crisis, with sharp contractions in Europe in 2012 and 2013 during the sovereign debt crisis. The contribution of investment to China’s economic growth has also declined, albeit more gradually. Investment accounted for more than half of China’s GDP growth in 2012-13, but by 2016 this had fallen to 39%.

Historically, the volume of world merchandise trade has tended to grow about 1.5 times faster than world output, although in the 1990s it grew more than twice as fast. However, since the financial crisis, the ratio of trade growth to GDP growth has fallen to around 1:1. Last year marked the first time since 2001 that this ratio has dropped below 1, to a ratio of 0.6:1. The WTO says the ratio is expected to partly recover in 2017, but says it remains a cause for concern.

A forthcoming research papers by WTO economists has attempted to understand this reduced ratio by looking at the expenditure components of demand (consumption, government spending, investment and exports).  It produces an import intensity-adjusted measure of demand that takes into account the import content of spending.  It finds that in most countries, investment spending is the most import intensive, while government spending is the least import intensive.  So a slowdown in investment spending, as happened in recent years in the developed countries, could have a larger than expected impact on trade flows.

It also finds that import intensity can change over time, again with implications for world trade.  For example, the import intensity of Chinese investment fell from 30% in 2004 to 18% in 2014, as Chine sourced more intermediate goods internally (in line with its plans to shift more of its growth to internal demand and become less export  dependent).  Meanwhile the import content of German investment grew from 24% in 1995 to 38% in 2014.  The WTO economists say these changes could alter the geographic distribution of trade, with stronger trade in Europe and weaker trade in Asia.

Ireland does not make the top thirty list of merchandise trade Exporters or Importers, but it does make the corresponding list of importers and exporters of Commercial Services.  Indeed Ireland is listed as the tenth biggest exporter of services last year, with a value of $146bn and 3.1% market share. 

More significantly (from a national accounts point of view) it was the world’s fifth biggest importer of services, with a value of $192bn, just $1bn ahead of the UK (which was the number two exporter of services, with exports worth $329bn. Ireland’s unusually high position in the service import table is likely related to both the size of the software and pharmaceutical industries here (which pay for patents and royalties, which are service imports).

The USA was both the number one importer and exporter of commercial services last year, with exports worth $733bn (15.4%) and imports worth $482bn (10.4%).