Globalisation of world economy hits a wall

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

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 per cent in the second quarter. (The bureau 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.)

By this metric, global trade has been sputtering since early last year, 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 journalists David Fickling and Rani Molla put it on 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. Mr Fickling and Ms 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 (GDP) has been declining since 2012. But the period from about 1987 to 2008 was remarkable. There was a big leap in trade's share of global GDP in the 1970s when oil prices rose, but otherwise there were long periods of relative stability. Then, from 1987 onwards, came the era of seemingly unstoppable globalisation. And now it seems to be over.

There are lots of possible explanations, some of which I have explored before. China, which drove the last decade of globalisation, is trying to rebalance its economy towards services and domestic consumption. Automation is reducing the importance of labour-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 globalised 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 Centre for Economic Policy Research in London, though, Professor Simon Evenett and Dr 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-neighbour 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 financing and so many incentives 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.

BLOOMBERG VIEW

A version of this article appeared in the print edition of The Straits Times on September 09, 2016, with the headline 'Globalisation of world economy hits a wall'. Print Edition | Subscribe