Trade off.

Photographer: Ander Gillenea/afp/getty images

Globalization Hits a Wall

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
Read More.
a | A

For the first time since early 2014, the dollar value of goods imported and exported by the G-20 countries actually grew a little in the second quarter of this year, the Organization for Economic Cooperation and Development reported last week.

Has Global Trade Stopped Shrinking?
G20 international merchandise trade, seasonally adjusted
 
Source: Organization for Economic Cooperation and Development

This is probably just because oil prices bounced back a bit after hitting a 12-year low in the first quarter. The world trade volume index maintained by the Netherlands Bureau for Economic Policy Analysis fell 0.7 percent in the second quarter. (The bureau, which also goes by its Dutch initials, CPB, doesn't actually go out and measure how big the things are that we're trading with each other; it just adjusts for price and currency fluctuations to give a clearer picture of trade flows.)

Another View of the Trade Slump
World trade volume index, 2005 = 100
 
Source: CPB World Trade Monitor

By this metric, global trade has been sputtering since early 2015, and the sputtering has been getting worse lately, not better.

For those who have been following the shipping business, this surely isn't a big surprise. As Bloomberg Gadfly's David Fickling and Rani Molla put it Tuesday: "Of the top 15 container lines that were in operation nine months ago, four have gone out of business or are in the process of doing so." Much of the world seems to be in denial about this, though. Fickling and Molla again: "The global container fleet is still getting bigger."

The denial is understandable because in the decades since the fall of the Berlin Wall in 1989, the main thing global trade has done is grow. There have been declines during recessions, but if the global economy was growing, trade was usually growing even faster. Since the initial bounceback from the last recession, this has no longer been true. Trade's share of global gross domestic product has been declining since 2012.

A Decline After a Long, Long Rise
Global trade as a share of world gross domestic product
 
Source: World Bank

One thing this last chart makes clear is how remarkable the period from about 1987 to 2008 was. There was a big leap in trade's share of global GDP in the 1970s when oil prices rose, but otherwise long periods of relative stability. Then, from 1987 onward, came the era of seemingly unstoppable globalization. And now it seems to be over.

There are lots of possible explanations, some of which I have explored before in this column. China, which drove the last decade of globalization, is trying to rebalance its economy toward services and domestic consumption. Automation is reducing the importance of labor-cost differences between countries, and manufacturers are rediscovering that it can be better to make products near customers rather than across the world. Flows of data and information are supplanting flows of goods and money. And it just seems obvious that global trade's share of GDP couldn't keep increasing forever. There is a limit to how globalized the global economy needs to be.

Those are all more or less neutral, or even positive, reasons for a plateau or decline in trade. They're bad news if you own shares in a shipping company, but not necessarily bad news for the global economy. In a report issued in July by the Center for Economic Policy Research in London (short version here; long version here), though, Simon Evenett and Johannes Fritz of the University of St. Gallen in Switzerland argue that increasingly trade-unfriendly government policies around the world may also be responsible for keeping trade down. They also make the interesting point that even if the trade plateau has been brought on by relatively benign natural causes, it could lead to beggar-thy-neighbor policies that make things worse:

If global trade has plateaued, then net gains by one nation’s exporters must come at the expense of another nation’s. A global trade plateau enhances the risk of trade tensions, especially in an era when governments of the major trading powers are putting in place so many incentives and financing to promote exports. The risk is that a negative feedback loop could develop: policy may have contributed to the global trade plateau -- and we cannot discount that future policy will be shaped by it.

In any case, we do seem to have entered a new economic era. Better get used to it.

  1. For Centraal Planbureau, a decidedly retro name that dates back to 1945, when it was founded by future economics Nobelist Jan Tinbergen.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net