Six Degrees of Separation Explain the Global Trade Pain to HSBCSimon Kennedy
The world economy is suffering from “six degrees of separation.”
That’s the conclusion of HSBC Holdings Plc economists Stephen King and James Pomeroy after they probed the deceleration of global trade since the 2008 financial turmoil.
Having grown almost twice the pace of economic growth in the run-up to the crisis and about three times its rate in the immediate aftermath, trade now barely outpaces expansion even as the volume of commerce keeps setting new highs.
While weak demand is to blame for much of the slowdown, at least half of it is the result of structural shifts that have frayed ties between countries and risk holding back the world economy, according to HSBC.
Such an environment marks a reversal from the pre-crisis years when the birth of the Internet, use of container ships and proliferation of free trade rounds were among the factors propelling exports higher.
To explain the reverse, the HSBC economists zeroed in on six explanations for why the world is no longer as linked-up as it once was.
For one thing, supply chains have been interrupted by environmental risks such as Japan’s Tsunami, geopolitical threats and faster wage gains in once-cheap emerging markets, according to King and Pomeroy. In the face of such trends, companies such as Caterpillar Inc. in the U.S. have even repatriated production.
Secondly, some developing nations such as China are also now able to supply their own inputs that their manufacturing industries previously imported, according to HSBC.
Protectionism is also mounting, mainly in the form of trade barriers outside of traditional tariffs such as regulatory standards for manufactured goods.
A fourth structural reason for weak trade is that services now account for a greater share of economic activity and are less easily tradable than merchandise.
Accessing trade finance may also be a challenge, according to HSBC, while some governments have implemented procurement requirements that favor home-grown producers. 2009 legislation in the U.S., for example, contained a “Buy America” provision that among other things required government transportation-infrastructure projects be built with American-made products.
There are some reasons for HSBC to think trade may improve. Trade deals such as the 12-nation Trans-Pacific Partnership may be struck, while emerging markets are set to trade more with each other as their economies modernize.
For the moment, King, HSBC’s chief global economist, is worried. “World trade growth is remarkably soft,” he said in a presentation. “There are some structural changes coming through.”