TRENDS IN INTERNATIONAL TRADE / ROUBINI GLOBAL ECONOMICS ( VERY HIGHLY RECOMMENDED READING - A MUST READ )

Greetings from RGE!

In this week’s note, we examine trends in international trade. The following content is drawn from a special report on trade in RGE’s newly released Q1 2010 update to our Global Economic Outlook.

After slowing to 3.0% in 2008, global trade volumes contracted by an estimated 13% in 2009—the first contraction since 1982 and the sharpest in the post-war period. The decline came as global demand and large inventory destocking hit the global supply chain; the credit market turmoil caused a severe crunch in trade finance; and oil and commodity prices corrected following a boom in early 2008. After plunging during Q4 2008 and Q1 2009, world trade bottomed in Q2 2009 and started growing in Q3 2009. Fiscal stimulus and slower inventory destocking boosted domestic demand, infrastructure spending and global manufacturing activity, and drove global trade in capital and consumer goods, auto parts and commodities. Trade flows slightly moderated in some countries in Q4 2009 as these temporary effects began to wane. By the end of 2009, exports of major trading countries were far below their 2008 peak levels, with the exports of Japan and especially the EU lagging those of the U.S., emerging Asia and Latin America. Imports of major trading countries, especially the U.S. and EU, stood far below their peak levels in 2008. Emerging Asia was the only major trading region in which imports reached 2008 peak levels, which might be an indication of reviving intra-Asia trade in parts and components, commodities and semi-finished goods, and rising Chinese demand for commodities and processing trade-related items—a precursor to improving exports to the U.S. and EU.

RGE forecasts world trade will grow by 4.5%-5.0% in 2010, led by fiscal stimulus spending, inventory restocking and a small improvement in global demand. Chinese commodity stockpiling, despite slowing from 2009 and a slow pick up in the OECD’s commodity demand, will support bulk trade in 2010. After aggressive inventory cutbacks in 2009, inventory restocking by importers and exporters during H1 2010 will modestly boost global trade in intermediate and final goods. But with economic growth, consumption and investment below their 2007-08 peaks in most advanced and developing economies, the pace of inventory restocking will be weak and will end by mid-2010 in most countries. As a result, the boost to global trade from the inventory cycle will be small and short-lived. During H1 2010, fiscal stimulus will continue to boost infrastructure spending, domestic demand and industrial activity. This will boost global trade in intermediate, capital and consumer goods, infrastructure-related commodities and auto parts and components. But the impact will wane in H2 2010 as most countries withdraw stimulus measures due to reviving domestic demand and fiscal concerns.

The Baltic Dry Index rose 200% in 2009, led by Chinese commodity demand and a pickup in commodity prices, but the index remains far below the record levels of 2008. While Chinese commodity stockpiling might have peaked, strong emerging market commodity demand, high global commodity prices and factors driving global trade (inventory restocking and fiscal stimulus) will support the Baltic Dry Index in 2010. Due to slow recovery in global trade and shipping demand, the entry of new shipping fleets into the market will exacerbate the shipping supply glut. This will continue to put downward pressure on shipping rates and earnings of shipping companies during 2010, notwithstanding the impact of deferred ship deliveries and global inventory restocking on shipping demand.

Improving global credit conditions and export demand have reduced the cost of trade credit, insurance and counterparty risk since H2 2009, though they remain high relative to pre-2008 levels. Demand for trade credit will pick up during 2010, with the gradual recovery in global trade. But the financing gap and credit costs are unlikely to decline significantly and will largely depend on improvements in bank balance sheets and credit growth in the economy.

The impact of inventory restocking and fiscal stimulus on global trade will fade in H2 2010. Advanced economies' imports will slow as private demand remains sluggish, keeping emerging economies' exports weaker than in the pre-crisis years, notwithstanding improving exports to other emerging markets. Emerging market imports will pick up from 2009, but imports meant for export to the U.S. and EU will recover slowly. Trade growth in the coming years is unlikely to reach the highs of 8.0% witnessed during 2003-07, since imports and exports in the East-West trade might take a few years to return to their high growth rates. In fact, global trade itself might witness structural changes going forward as consumption grows sluggishly in the U.S. and EU. RGE projects that consumption in emerging markets will be inadequate to fill this gap in the short-term. But surplus countries and developing countries in general, with rising incomes and industrialization, have the potential to increase domestic consumption in the coming years. This will boost their trade in commodities, capital goods and finished goods, and change their export and import baskets over time. Going forward, emerging markets will increasingly trade amongst each other for final demand, rather than re-exporting goods to the U.S. and EU, driving global trade flows and changing its direction and composition.

Despite the G20 leaders' pledges to avoid protectionism, tariff and non-tariff barriers and subsequent retaliation have actually increased since the global recession began. Trade tensions between major trading nations will be prevalent until economic growth improves and unemployment eases significantly, and China will be the main target of these measures. Yet, at least so far, the impact of protectionism on trade flows has been small.

Economic and political constraints at home will prevent Doha trade ministers from reaching a breakthrough on agricultural subsidies and industrial tariffs in 2010, when their economies are still recovering. Talks might be delayed until 2011 if some economies witness weaker growth in H2 2010. But the global recession has provided an opportunity to reassess the role of the WTO. The WTO should expand its surveillance mechanism to monitor the use of protectionist measures during recessions, such as tariff and non-tariff barriers, export subsidies, protectionist clauses under fiscal stimulus (such as the “Buy American” clause), and the bailout national champions (such as the auto companies). Besides focusing on the provision of trade finance, the WTO should ensure that global trade talks going forward address issues related to environmental and labor standards, food and energy security, and global warming. Yet adding these measures to the trade agenda might make a global trade deal more difficult. Slow progress on multilateral trade talks will encourage countries to continue to pursue bilateral and regional trade agreements.