Look Out for the Great Trade Stagnation
Something a little worrying has happened to the global economy: Trade is slowing down.
Since the end of World War II, the world has grown steadily more globalized. Trade has grown faster than global gross domestic product itself. Supply chains have lengthened. Companies have become more multinational. The rate of globalization reached a fever pitch in the 1990s and early 2000s.
But then the financial crisis hit. Trade plummeted in 2009, falling faster than GDP, only to rebound a year later. But since then, trade has stopped growing as a percentage of output, the way it had in the past. A few years isn't necessarily enough to establish a trend, but the slowdown in trade is unprecedented in the postwar era.
There are many competing explanations for the pause in the growth of trade. One explanation is simply a series of negative shocks to major economies around the world. The Great Recession touched off an ongoing crisis in the euro zone, which has been followed more recently by a major slump in China. This may simply have hit the global trade system with a series of successive blows that were unprecedented in severity and duration.
But there are reasons to think something deeper and longer-lasting is going on. An International Monetary Fund working paper by Cristina Constantinescu, Aaditya Mattoo and Michele Ruta finds a trend break in the trade-to-GDP relationship that began before the financial crisis. Others have noted that even though global growth has resumed in the last few years, trade is responding more sluggishly than in past recoveries.
What are some long-term factors that might be causing a trade slowdown? It might simply be a matter of laws. Paul Krugman, who won a Nobel prize for his research on trade, points out that the steady pace of trade liberalization that marked the postwar period has slowed or even stopped in recent years. Another possibility is that globalization proceeds in waves. European Union integration and the incorporation of China into the global trading system may have both run their course. Alternatively, companies may have reached the limits of outsourcing and offshoring.
But whatever the reason, the question is: Should we be worried?
There is a good argument for “no.” As many studies have by now noted, offshoring presents workers in developed countries with stiff competition. Occupations that are more exposed to global competition experience greater job losses when globalization expands. In addition, the dumping of Chinese and other developing-country labor onto the global labor markets probably pushed down labor’s share of income, boosting capital owners at the expense of workers. A slowdown in globalization will put the brakes on both of these processes, holding down inequality and slowing the rate at which workers are displaced from their jobs.
In other words, the slowdown of globalization may bring just the relief that beleaguered American, Japanese and European workers need. Economists who tell you that trade is always a net benefit overlook the pain it can inflict on substantial groups of people within individual countries. These distributional effects of trade can be so severe on those who lose out that they can swamp the GDP benefit that trade provides. If this has been happening in rich countries, then a slowdown in trade is actually good news.
But there is also a pretty big reason to worry. Globalization is probably one of the big drivers of productivity gains. And productivity, in the long run, is the reason our standard of living goes up and up.
One reason for this is simply specialization. Imagine if you had to make everything that went into a sandwich from scratch -- it would cost you thousands of dollars and many, many hours. With our highly specialized global trade network, however, you can buy that sandwich for just a few dollars. That’s the productivity that specialization creates. Cheap foreign goods may provide competition for workers in developed countries, but they also can boost productivity quite a lot. From the perspective of General Motors, ordering a cheap (but perfectly fine) auto part from India can be just as good as inventing a new machine that makes the part more cheaply domestically.
Another reason is openness. Trading with other countries provides opportunities to learn ideas from foreigners, by reverse-engineering foreign technology, hiring foreign workers or simply observing foreign practices and products. Development economists find that countries with a high degree of openness and an orientation toward trade have faster productivity growth than other countries.
So the trade slowdown could be a factor behind the productivity slowdown that has economists wringing their hands. The Great Stagnation may be, in part, a trade stagnation. Instead of discovering fewer new technologies, we may simply be discovering fewer opportunities for globalization.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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