The Global Trade Outlook
The international trade of goods is experiencing rapid growth. Many countries’ exports are increasing by double digits, and world trade has already exceeded pre-pandemic levels. The global trade recovery, however, conceals a significant discrepancy: small economies and the poorest nations are lagging behind. Their recovery is still a long way off.
How has trade growth played out?
The global economy came to a halt in April last year due to the COVID-19 pandemic. Production and consumption slowed dramatically around the world, and international trade seemed to be heading for a long-term fall. However, global trade recovered quickly by summer last year.
Global merchandise had begun to rebound and by the end of the year, many countries experienced a substantial resurgence in trade. These countries include Brazil, China, India, Japan, Korea, Russia, South Africa, the United States (US) and European Union (EU).
Note: Quarterly growth is the rate of change in seasonally adjusted values from one quarter to the next. The four quarters of the year are referred to as annual growth. The figures for the third quarter of 2021 are preliminary. The fourth quarter is a forecast.
By the first quarter of this year, global trade recovered to pre-pandemic levels, seeing a 10 per cent increase in comparison to the same period the previous year, according to the UN Conference on Trade and Development (UNCTAD). International trade continued to rebound strongly in the third quarter of this year — although unevenly across nations and sectors. The value of global imports and exports of products reached 5.6 trillion dollars, a new quarterly high.
Some economies were expected to recover more quickly and strongly than others. China’s and US’ economies, particularly, were predicted to be the primary drivers of global growth this year. This should also benefit countries that have more integrated trade with them such as Canada, Mexico and East Asian countries.
The recovery of trade, however, is uneven, particularly among developing nations. The disparities are considerable across countries, with some developing regions falling far behind the global average. It was stated by the World Trade Organization (WTO) earlier on in 2021 that global trade is expected to rebound strongly but unevenly, with an increase of 8 per cent expected in global merchandise trade. However, it was warned that regional imbalances, persistent weakness in services trade, and delayed vaccine deadlines, particularly in developing countries, harmed the favourable short-term picture for global trade. Furthermore, the WTO stated that the COVID-19 pandemic continues to pose the greatest threat to trade prospects since new outbreaks of infection might rapidly disrupt recovery.
For example, India’s trade growth surged in the third quarter for both commodities and services, while China’s remained essentially stable, according to the report. China’s “below expectations” growth in the third quarter of 2021 is one of the elements leading to the report’s uncertainty about this year. This is because of evidence that China’s economic growth is starting to slow down, and as COVID-19 restrictions resurface in other parts of Asia (particularly in Southeast Asia, while the US and European economies continue to open up), supply chains are being disrupted.
Insight 1: Exports limited to East Asian and Pacific economies
Even while regional inequalities were less significant than in the first half of the year, trade growth in the third quarter of this year remained inconsistent. Trade flows continued to expand more rapidly for developing countries than for established economies, indicating that this pattern had become more widespread. “While this trend was driven by strong trade growth in East Asian developing economies in previous quarters, it has become broader across developing countries in Q3 2021,” the report says. “Furthermore, in Q3 2021 trade growth has been relatively lower for East Asian economies than for other developing countries.”
The report by the United Nations Conference on Trade and Development (UNCTAD) states “the trade recovery for developing countries becomes much more muted when East Asian economies are excluded and disappears when only exports are considered.” Exports in developing countries, including East Asia, increased by 16 per cent from the first quarter of 2019 to the same quarter this year, as shown in Figure 2 below.
When East Asia is removed from the equation, however, developing countries saw only 1 per cent growth year over year and a 2 per cent drop in Q1 2019 exports. This slow-moving recovery in trade for developing countries may indicate more problems, including the possibility of a two-speed recovery in trade between developing and developed nations. According to Sarah Fowler, an international economy analyst at Oxford Analytica, there is a “high” likelihood of such a trade recovery. The value of exports in the first quarter of this year has varied in different parts of the world. They were lower than pre-crisis levels for nations in the Middle East, South Asia, and Africa. South American exports improved in comparison to the first quarter of 2020 but remained below 2019 levels. The recovery has been fueled in large part by East Asian economies’ ongoing strong export growth and global trade continues to grow as demand in developed economies grew and global value chains rebounded. This fast and substantial recovery in trade was not expected.
Insight 2: Product Type and Service Exported Matters
The trade collapse did not affect all products equally, and the rising tide did not raise all sectors of the global trading system evenly. The effects of trade on specific goods, services, and trading partners paint a quite different picture. Trade in services fell more last year and recovered at a slower rate than trade in products. Trade in travel and tourism services, unsurprisingly, plummeted, while trade in digitally provided services, such as telecommunications and IT services, increased considerably. Overall, the value of the Organisation for Economic Co-operation and Development (OECD) nations’ service exports fell by 16.7 per cent last year, more than double the value of goods exports, which fell by 8.2 per cent. As services represent a bigger share of the economy than their weight in international trade, this was one factor supporting the comparatively significant output changes compared to trade changes.
Several types of goods and services saw a significant drop in trade, while others saw significant growth. The merchandise trade product structure has evolved substantially, with trade in several products plummeting (for example, cars, aircraft, steel, fuels, mechanical machinery), while some products in trade rose (for example, protective equipment and medicinal products, food, and “home nesting” products like domestic appliances and electronics). The disparity in trade impacts across product categories last year was not only greater than during the global financial crisis of 2007 but also greater than any other year in the previous two decades, according to an analysis conducted by the World Economic Forum.
Trade in energy-related items expanded the most among manufacturing sectors, boosted by high demand for and price rises in fossil fuels. Meanwhile, in other sectors affected by the worldwide semiconductor shortage, such as the automotive and electronics industries, trade was more subdued in the third quarter of this year.
Insight 3: Size of Economy a Big Issue
The disparities in international trade recovery patterns do not play out as most people would expect; the size of the economy appears to have an outsized impact on trade recovery than income levels. This is where the challenge of being small and poor comes into play. The poorest countries’ export levels are still roughly 5 per cent lower than they were before the pandemic as well as the level of exports of goods of the smallest economies being below pre-pandemic levels. With the exception of least developed nations, there is no evidence that richer countries’ export levels have rebounded faster than others. However, there is a strong pattern that export recovery has been significantly weaker for smaller economies. Data demonstrates that the smaller the economy, the worse the export recovery to pre-pandemic levels has been.
Note: The growth rates in each decile are simple averages of the economies in that decile (economic size measured by GDP). Only merchandise trade is included in this data, which has been seasonally adjusted.
Further analysis is needed for an explanation, but there could be many reasons ranging from the fact that smaller economies are less diverse than larger economies and are more vulnerable therefore pandemic’s impact was worse. Economies such as these are ill-equipped to deal with a global pandemic. Global Value Chains (GVCs) connecting to developed and growing economies have been a major driver of trade recovery so that is a potential reason along with differences in financial resources, supply chain disruptions and lower vaccination rates.
Participation in GVCs is done by all countries, but they do so in different ways. GVCs, in fact, have fueled an economic revolution over the last three decades, with growth accelerating, incomes rising, and poverty rates plummeting to a record low of 10 per cent. GVCs are still a vital road to growth, according to a report. In fact, trade may be the only way for development and economic progress for small economies.
Major reasons for slower trade growth in smaller economies include lack of financial resources, supply chain shocks and low vaccination rates. Financial resources are needed for the development of economies of countries and having substantial differences in these may affect a smooth and equal rebound amongst economies of the world that have reduced economic conditions. Having reduced economic conditions means having lesser financial resources. Disruptions in the supply chain may result in a shift in international trade as several strains have been placed on the supply chain as a result of the pandemic with factories closing, ports having delays, and many sectors of the supply chain experiencing labour shortages, affecting trade to continue. As for low vaccination rates as a reason for uneven trade recovery; vaccine inequity is partially to blame, which analysts say rich countries continue to acquire far more doses than they use month after month, leaving least developed countries behind in the race of vaccinating their populations.
Trade performance in 2021 remained strong but there were discrepancies. Developing countries’ trade flows continued to grow at a faster rate than developed economies’. However, when East Asian economies are removed, the trade rebound for developing countries becomes considerably weaker, and it completely disappears when just exports are included. The global trade collapse did not affect all items in the same way, and the rising tide did not lift all sectors of the global trading system in the same way. The size of the economy, rather than income levels, appears to have a greater impact on trade recovery.
Overall, regional trade recovery continues to differ. The Middle East, South America, and Africa, in particular, are expected to have the weakest export recoveries, while the Middle East, Commonwealth of Independent States, and Africa will have the slowest import recoveries.
Looking at the global trade outlook ahead, it is forecasted to increase 4.7 per cent next year as the rate of growth reaches its pre-pandemic trend. The prediction is still vulnerable to downside risks, but it’s difficult to assess their relative importance. The risks include inflationary surges, longer port waits, increased shipping charges, and lengthy semiconductor shortages, with supply-side disruptions becoming worse by the sudden and unexpectedly robust recovery of demand in many emerging economies. The pandemic itself could pose considerably greater threats to global trade and economy, especially if more deadly variants arise.
A positive outlook is mostly reliant on the removal of pandemic limitations, the continuation of a good trend in commodity prices, overall trade protectionist policy limits, and favourable macroeconomic and fiscal conditions. The fiscal stimulus packages, especially in developed nations, are likely to boost global trade recovery significantly. Due to rising commodity prices, the value of global trade should likewise increase.