With emerging markets such as China engaging in recalibration toward a service-based economy, rather than one centered on goods, global trade has seen a slowdown.
“To the degree that the trade slowdown represents fewer opportunities in manufacturing, it’s another knock on the potential for economic growth generally,” says Robert Lawrence, professor of international trade and investment at Harvard University in Cambridge, Massachusetts. Productivity growth is generally more rapid in goods than in services, he continues, so with this greater economic transition, “you’d expect productivity growth to slow down as well.”
Trade has grown only 3 percent a year on average since 2011, compared with 6 percent a year from 1983 to 2008, according to the World Trade Organization. Trade grew at twice the rate of the global economy during that earlier period but is now on pace to lag global gross domestic product growth for the third year in a row. As for the goods-services equation, “Spending has shifted against goods and goods-intensive activity,” Lawrence notes. “Equipment expenditures are weak around the world. So there has been a shift in the composition of spending away from tradable products,” he says.
Part of the problem is that trade in services isn’t accurately counted in trade data, so trade may actually be stronger than it appears, says Lee Branstetter, professor of economics and public policy at Carnegie Mellon University in Pittsburgh. “My concern is that the focus on merchandise goods misses an increasingly large component of global commerce.”
A component of a manufactured product might be included in trade statistics two or three times, as it is passed along to different countries during various stages of production. “But a lot of goods have services value embodied inside them,” Branstetter points out. “An increasing fraction of services trade is digitally enabled or digital in nature. Statistics haven’t captured that.”
Internet commerce provides a good example of that failure, Branstetter says. Cross-border Internet traffic soared 1,800 percent from 2005 to 2012, according to New York–based consulting firm McKinsey & Co. “That doesn’t mean that the value of digitally enabled service trade has increased by 18 times,” he continues. “But I think there is a growing value of digital services trade that isn’t counted.” Another reason Branstetter cites for underestimating services trade: The minimum services export that must be reported to the U.S. government is $6 million, compared with $200 for goods.
“The digital services problem probably doesn’t account for all of the trade slowdown, but we know this is growing rapidly,” Branstetter says.
The sluggishness of global economies — particularly in China — is also depressing trade. Last week the International Monetary Fund downgraded its 2015 global GDP forecast by 0.2 percentage points, to 3.1 percent growth, down from 3.4 percent last year. China’s official statistics put its growth at 7 percent, but many economists and market watchers say the true number is closer to 3 to 5 percent. As for the broader emerging markets, the IMF edged down its 2015 growth forecast to 4 percent from a prior estimate of 4.2 percent.
When it comes to the global supply chain, from the early 1990s through the mid-2000s, offshoring was all the rage, with manufacturing moving from high-cost developed economies to low-cost emerging economies. Now, though, “the low-hanging fruit for offshoring has now been picked,” Branstetter says. “Some of the countries that were low-cost for manufacturing are now high-cost. There’s not a massive trend of reshoring, but offshoring has certainly slowed.” That means less trade.
Trade-dependent emerging markets such as Brazil and Malaysia stand to lose most from the slide in trade. “Economies can no longer count on export-led growth like in the last couple of decades,” says Nariman Behravesh, chief economist at financial analysis and forecasting firm IHS in Lexington, Massachusetts. “They have to put together policies that will boost domestic demand.”
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