TWN Info Service on Finance and Development (Apr11/02)
12 April 2011
Third World Network

World trade to see modest growth of 6.5% this year, says WTO
Published in SUNS #7126 dated 8 April 2011

Geneva, 7 Apr (Kanaga Raja) -- Following a record-breaking surge of 14.5% in the volume of exports in 2010, exports this year are expected to see a more modest increase of 6.5%, the World Trade Organization (WTO) said in its latest projections for world merchandise trade released on 7 April.

According to a WTO press release, the shipments from developed countries will increase by around 4.5%, while those from developing economies and the Commonwealth of Independent States (CIS) will advance by 9.5%.

The WTO said that these projections include the likely impact of Japan's earthquake, but if the repercussions turn out to be worse than expected, it will have to revisit the forecast in the coming months.

The projections referring to growth in the volume of world trade - i. e. trade in real terms, adjusted for changes in prices and exchange rates - are based on a consensus estimate of global output growth by economic forecasters, who predict a GDP growth rate of 3.1% in 2011 at market exchange rates, said the WTO.

[According to a recent IMF staff working paper (WP/11/16) on trade and trade finance, "The decline in merchandise trade in the current crisis is in line with historical relationships between changes in trade and changes in output." Economists generally are cautious in drawing generalised conclusions on trade and output growth, since the causative relationships between the two are ambiguous. - SUNS]

At a media briefing, WTO Director-General Pascal Lamy said that world trade bounced back strongly in 2010, reaffirming the role of trade in the global economic recovery and development. Despite protectionist pressures, markets remained by and large open during the economic crisis, permitting countries to use trade as an important tool to facilitate economic stability.

Speaking on the Doha Round of trade negotiations (which are currently at an impasse particularly over the sectoral initiative in non-agricultural market access), the WTO head said that the negotiations are "going through a very difficult stage".

He said that for many, the WTO can resemble a "mule" - being a reliable, durable and dependable animal.

"And the mule, much like the multilateral trading system, as evidenced by these numbers (on trade), does not go backwards... The difficulty with the mule is that they sometimes get stuck - they don't go backwards, but they refuse to move forward either," he said, adding that this is what is happening with the multilateral trading system today.

"We have a serious problem in sectoral negotiations," he said, explaining that its purpose is to add tariff reductions on top of those that would be achieved through the formula cuts, which are on the order of 50% for developed countries and 40% for developing countries. The purpose of the sectoral negotiations is how much more than that can members agree to, he said, pointing out that there is "a clear gap" among members' positions on this issue.

How large is this gap is what he is presently trying to assess with the help of the main actors in the negotiations, said Lamy, adding that he will report on his assessment on this issue to the entire membership by Easter, when members will be having in front of them texts from the Chairs of all the negotiating groups, reflecting where members are in the negotiations.

"For the first time in ten years, members will be able to see the whole product of their work so far - the areas of convergence as well as the areas of divergence," said the Director-General, adding that after Easter, the membership will be able to take a collective view as to the next steps, i. e., what direction they want the negotiations to take.

According to the WTO press release on world trade in 2010 and prospects for 2011, the 14.5% rise (in volume of exports in 2010) was the largest annual figure in the present data series, which began in 1950 and was buoyed by a 3.6% recovery in global output. It was a rebound from the 12% slump in 2009, returning trade to the 2008 peak level and to more normal rates of expansion.

Nevertheless, the financial crisis and global recession continue to have an impact, the WTO said. For 2011, the WTO economists are forecasting a more modest 6.5% increase, but with uncertainty about the impact of a number of recent events, including the earthquake and tsunami in Japan. If achieved, this would be higher than the 6.0% average yearly increase between 1990 and 2008.

The WTO said that the factors that contributed to the unusually large drop in world trade in 2009 may have also helped boost the size of the rebound in 2010. These include the spread of global supply chains and the product composition of trade compared to output. "Global supply chains cause goods to cross national boundaries several times during the production process, which raises measured world trade flows compared to earlier decades. The quantification of this effect would require data on trade in value added that are not currently available," it added.

"The goods that were most affected by the downturn (consumer durables, industrial machinery, etc.) have a larger share in world trade than in world GDP, which increased the magnitude of the trade slump relative to GDP in 2009, and which had a similar positive effect during the recovery of 2010."

"The short-term outlook is clouded by a number of significant risks factors in addition to the catastrophes in Japan," said the WTO, citing these risk factors as being rising prices for food and other primary products, and unrest in major oil exporting countries. "Adverse developments in any of these areas could potentially set back the economic recovery and limit the expansion of trade in the coming year."

It also noted: "The full impact of the Japanese disaster is particularly difficult to gauge since it is complicated by a simultaneous nuclear incident, which is hampering relief and rebuilding efforts. The limited amount of research on the economic consequences of natural disasters suggests, however, that the trade impact should be relatively small, especially in the medium-to-long term."

Higher prices for primary commodities and the extraordinary growth of trade in developing Asia helped boost the combined share of developing economies and the CIS in world exports to 45% in 2010, its highest ever.

According to the WTO, developed economies recorded export growth of nearly 13% in 2010, compared to a 16.5% average increase in the rest of the world. China's exports increased in 2010 by a massive 28% in volume terms.

Although the growth of world exports in 2010 was the fastest on record in a data series going back to 1950, it might have been even faster if trade had quickly reverted to its pre-crisis trend. This did not happen. The rebound was strong enough for world exports to recover their peak level of 2008, but it was not strong enough to bring about a return to the previous growth path.

The 3.6% growth rate of world GDP for 2010 is also less robust than it might appear at first glance. It was above its average rate of 3.1% between 1990 and 2008, but it was far from a record, said the WTO.

It added that a number of factors combined to make trade and output grow more slowly than they might otherwise have done. First, curtailment of fiscal stimulus measures in many countries dampened economic activity in the second half of the year. Second, although oil prices stabilized at around $78/barrel in 2010, they were still high by recent historical standards (e. g. oil prices averaged $31/barrel between 2000 and 2005).

Finally, said the WTO, persistent unemployment prevented domestic consumption from rebounding more strongly in developed countries and limited income growth and import demand. The OECD average unemployment rate was 8.6% in 2010 (up from 6.1% in 2008), and unemployment remained at or near 9% in the United States throughout the year.

World GDP at market exchange rates expanded 3.6% in 2010, one year after an unprecedented contraction of 2.4% that accompanied the financial crisis in 2009. Output of developed economies rose 2.6% in the latest year after falling 3.7% in 2009, while the rest of the world (including developing economies and the CIS) grew 7.0%, up from 2.1% in 2009.

According to the press release, the uneven recovery in output produced an equally uneven recovery in global trade flows in 2010. While world merchandise exports rose 14.5% in volume terms, those of developed economies increased by 12.9%, and combined shipments from developing economies and the CIS jumped 16.7%. Imports of developed economies grew more slowly than exports last year (10.7% compared to 12.9%) while developing economies plus the CIS saw the opposite happen (17.9% growth in imports compared to 16.7% for exports).

Asia exhibited the fastest real export growth of any region in 2010 with a jump of 23.1%, led by China and Japan, whose shipments to the rest of the world each rose roughly 28%, said the WTO economists.

Meanwhile, they added, the United States and the European Union saw their exports growing more slowly at 15.4% and 11.4%, respectively. Imports were up 22.1% in real terms in China, 14.8% in the United States, 10.0% in Japan, and 9.2% in the European Union.

With respect to merchandise and commercial services trade in value or dollar terms, the WTO said that as a result of rising commodity prices and a depreciating US currency - down 3.5% on average against major currencies in 2010 according to US Federal Reserve nominal effective exchange rate statistics - growth in the dollar value of world trade in 2010 was greater than the increase in volume terms.

World merchandise exports were up 22%, rising from $12.5 trillion to $15.2 trillion in a single year, while world exports of commercial services rose 8%, from $3.4 trillion to $3.7 trillion. Nominal merchandise exports of developed economies jumped 16% in 2010 to $8.2 trillion, up from $7.0 trillion in 2009.

However, because this rate of increase was slower than the world average of 22%, the share of developed countries in world merchandise exports fell to 55%, its lowest level ever, said the WTO economists.

The story is similar on the import side, where developed economy imports increased 16% to $8.9 trillion, but their share in world imports dropped to 59% from 61% in 2009 and 63% in 2008.

Trade imbalances of leading economies widened in 2010, as exports and imports bounced back from their depressed levels of 2009. However, for most countries the gap between exports and imports was smaller after the crisis than before, said the WTO.

It noted that the monthly trade deficit of the United States widened from a low of $32 billion in February 2009 to around $62 billion per month on average in the second half of 2010, and the deficit for the year increased 26% compared to 2009. However, the 2010 deficit of roughly $690 billion was 22% less than the corresponding deficit of $882 billion in 2008.

China's merchandise trade surplus for 2010 totalled $183 billion, roughly 7% less than the $196 billion it recorded in 2009, and 39% less than the nearly $300 billion surplus of 2008. The European Union's had a trade deficit with the rest of the world of $190 billion in 2010, which was up 26% from 2009 but down 49% from the $375 billion it recorded in 2008.

Japan was an exception to the trend towards smaller trade deficits/surpluses after the crisis. In 2008, the country recorded a $19 billion surplus of exports over imports, but this nearly quadrupled to $77 billion in 2010.

In terms of exchange rates, the WTO economists said that by February 2011, the Yuan had appreciated against the US dollar in nominal terms by around 3.8% from its previous level. However, real appreciation against the dollar is happening at a faster rate due to higher inflation in China.

China's real (i. e., inflation adjusted) effective exchange rate against a broad basket of currencies rose 1.3% in 2010 according to indices supplied by J. P. Morgan. By comparison, the US dollar registered a 5% real effective depreciation against trading partners' currencies during the same period.

The yen appreciated by nearly 7% in nominal terms against the dollar in 2010, but its real effective rate was only up by less than 1% on account of a falling price level (i. e. deflation) in Japan.

On the other hand, the strong nominal appreciations of the Brazilian real (12%) and the Korean won (10%) against the dollar were matched by large real effective rises (15% and 9%, respectively) that would have raised the cost of goods from these countries relative to other countries' exports, said the WTO.

As to prospects for 2011, the WTO economists said: "World trade flows are continuing their recovery, building on the large gains of 2010, with slower but still slightly above average growth in 2011. However, recent events in the Middle East and Japan have raised the level of global economic uncertainty and tilted the balance of risk towards the downside."

The WTO economists' baseline projections for world merchandise trade in 2011 would see exports grow by 6.5%, with shipments from developed countries increasing by around 4.5% and those from developing economies and the CIS advancing 9.5%.

The WTO said that the trade forecast assumes world GDP growth of 3.1% at market exchange rates for 2011, with developed economies gaining 2.2% and the rest of the world (including developing economies and the Commonwealth of Independent States) advancing 5.8%.

"Even though the risks are mostly on the downside, there is also some upside potential if the uncertainly in the Middle East resolves itself soon and if unemployment rates start to come down more quickly in the United States. The latter would release a considerable amount of pent up demand for goods, which would stimulate imports and drive world trade higher."

The limited amount of existing research on the consequences of natural disasters for economic growth suggests that even very large disasters generally do not have noticeable effects on output as measured by GDP, especially in the long run, said the WTO.

Citing a recent paper by Gassebner, Keck and The (2010) that examines data on disasters in 170 countries between 1962 and 2004, the WTO economists said that using the methodology of this paper, they found that the expected impact of the Japanese earthquake is to: reduce the volume of Japanese exports by between 0.5% and 1.6%; and increase the volume of Japanese imports by between 0.4% and 1.3%.

Some of the economic impact of the earthquake could be transmitted to other countries through global supply chains. Anecdotal evidence is already being reported on shortages of Japanese auto parts and electronic components in other countries, and on ships being unable to unload perishable food in Japan because of a lack of refrigeration due to reduced electricity supplies, the WTO said.

"However, less output and trade in one quarter will probably be followed by increased activity in subsequent quarters, so the cumulative effect over the course of the year may not be large," the WTO concluded.

It stressed that the prospect of sharply higher oil prices probably poses a greater threat to the world economy and trade than the Japanese earthquake. Fears of a prolonged conflict in Libya and spreading unrest in the Middle East have lifted oil prices above $100/barrel.

"An interruption of supplies from any other major producer would raise prices higher still, with potentially significant implications for the global economy. In such an event, the WTO would have to revisit its trade projections," said the WTO economists. +