TWN Info Service on WTO and Trade Issues (Apr09/01)
1 April 2009
Third World Network

Global trade to decline 9% in 2009, says WTO
Published in SUNS #6667 dated 25 March 2009

Geneva, 24 Mar (Kanaga Raja) -- In what it viewed as the biggest such contraction since the Second World War, the World Trade Organization (WTO) has forecast that exports will decline by roughly 9% in volume terms this year due to the collapse in global demand brought on by the biggest economic downturn in decades.

The contraction in developed countries will be particularly severe with exports falling by 10% this year. In developing countries, exports will shrink by some 2% to 3% in 2009, WTO economists said.

In its annual assessment of global trade, the WTO said that economic contraction in most of the industrial world and steep export declines already posted in the early months of this year by most major economies - particularly those in Asia - makes for an unusually bleak trade assessment for this year.

According to the WTO, signs of the sharp deterioration in trade were evident in the latter part of 2008 as demand sagged and production slowed. Although world trade grew by 2% in volume terms for the whole of 2008, it tapered off in the last six months and was well down on the 6% volume increase posted in 2007.

"For the last 30 years, trade has been an ever increasing part of economic activity, with trade growth often outpacing gains in output. Production for many products is sourced around the world so there is a multiplier effect - as demand falls sharply overall, trade will fall even further. The depleted pool of funds available for trade finance has contributed to the significant decline in trade flows, in particular in developing countries," said WTO Director-General Pascal Lamy.

"As a consequence, many thousands of trade related jobs are being lost. Governments must avoid making this bad situation worse by reverting to protectionist measures which in reality protect no nation and threaten the loss of more jobs," he added.

The WTO said that following the dramatic worsening of the financial crisis since September of last year, real global output growth slowed to 1.7%, compared to 3.5% in 2007, and is likely to fall by between 1% and 2% in 2009.

"This is the first decline in total world production since the 1930s, and its impact is magnified in trade."

The WTO warned that the extraordinary turbulence of world markets in recent months and the continued uncertainty about the near-term trajectory of the global economy makes gauging the preliminary 2008 trade estimates and 2009 projections unusually difficult.

A notable aspect of the current slowdown in world trade is its synchronized nature. Monthly exports and imports of major developed and developing economies have been falling in unison since September 2008.

With the growing share of developing countries' trade in the global total, and increased geographical diversification of these flows, it was assumed by some commentators that a "decoupling" effect would have made developing countries less vulnerable to economic turmoil in developed countries. "This has not turned out to be the case."

The WTO's preliminary estimate of 2% growth in world trade volume for 2008 is substantially lower than the forecast of 4.5% growth issued a year ago. However, last year's outlook did identify significant downside risks related to developments in financial markets. A large part of the explanation for the over-estimation was the unexpected and very sharp drop in global production in the fourth quarter of 2008.

In projecting trade growth for 2009, the WTO said that it assumed a normal pattern for a recession, where trade falls, remains weak for a time and then resumes its upward trajectory and begins to return to its previous trend.

If this basic scenario holds, world merchandise trade is likely to fall some 9% in volume terms in 2009 (i. e., where price changes have been removed from the calculation), with developed economy exports falling by some 10% on average and developing country exports shrinking by 2-3%.

Trade prospects for 2009 are heavily conditioned by the financial crisis that began almost two years ago in the United States. The crisis intensified dramatically following the collapse of the Wall Street investment bank Lehman Brothers in September of last year, and the government-led rescue of a number of financial institutions in the United States and elsewhere.

"Turmoil in the financial sector and acute credit shortages spread inexorably to the real sector. Declining asset prices, faltering demand and falling production translated into dramatically reduced and in some cases negative production and trade growth in many countries. Trade has also been affected adversely by a sharp shrinkage in credit to finance imports and exports."

Although the crisis began in the United States, financial institutions and economies throughout the developed and developing world have been severely affected, said the WTO. It also noted that the financial crisis has disrupted the normal functioning of the banking system and deprived firms and individuals of much-needed credit.

Not even China, with its dynamic economy, can insulate itself from the global downturn when most of its main trading partners are in recession, the WTO said, adding that China's exports to its top six trading partners (treating the EU as a single partner) represented 70% of the country's total exports in 2007. All of these trading partners are currently experiencing economic contraction or slowdown and are likely to exhibit weak import demand for some time.

The WTO noted that available monthly data for most major traders show large drops in merchandise exports and imports through the first two months of 2009. An exception to this pattern of decline in trade flows is discernible for certain economies in Asia, where positive monthly import growth numbers were recorded for China (17%) and also for Singapore, Chinese Taipei and Vietnam.

While this is only a single month of data, and should therefore be interpreted cautiously, it could be evidence of slowing decline and perhaps a "bottoming out" of negative trade growth trends. Future trade growth will, of course, depend on what happens to demand elsewhere in the world economy.

In an overview of trade and production developments in 2008, the WTO said that merchandise trade growth in real terms (i. e. adjusted to discount changes in prices) slowed significantly in 2008 to 2%, compared to 6% in 2007.

In dollar terms (which includes price changes and exchange rate fluctuations), world merchandise exports increased by 15% in 2008, to $15.8 trillion, while exports of commercial services rose 11% to $3.7 trillion.

The share of developing economies in world merchandise trade set new records in 2008, with exports rising to 38% of the world total and imports increasing to 34%.

Germany's merchandise exports in 2008, at $1.47 trillion, were slightly larger than China's $1.43 trillion. This meant that Germany retained its position as the world's leading merchandise exporter.

The WTO noted that despite its strong overall trade performance, China's exports in some product categories faltered towards the end of the year. Exports of office and telecom equipment to the rest of the world, worth some $381.5 billion in 2008, fell 7% in the fourth quarter compared to the same period of the previous year, after growing at an average rate of 17% during the first three quarters.

Overall, exports of Chinese manufactured goods to the United States increased just 1% over the previous year, after growth of 14% in the third quarter.

One of the sectors hardest hit by the global recession has been the automobile industry, said the WTO. Japan's exports of automotive products to the rest of the world fell by 18%, while exports to the United States dropped by 30% in the fourth quarter of 2008.

As with merchandise exports, commercial services exports for which data were available fell in the fourth quarter of 2008 compared with the previous year - albeit less so (7-8%) than merchandise (12%).

For the year as a whole, commercial services exports grew more slowly than goods exports (on a balance of payments basis), rising by 11% compared with 15% for goods. The United States remained the largest exporter and importer of commercial services, with exports of $522 billion and imports of $364 billion.

According to the WTO, one indicator of the severity of the global downturn in trade has been the fall-off in international shipping. According to the International Air Transport Association (IATA), air cargo traffic was down 23% in December 2008 compared to a year earlier, led by a strong decline of 26% in the Asia-Pacific region.

To give some perspective on the magnitude of this drop, the decline recorded in September 2001, when most of the world's aircraft were temporarily grounded, was only 14%.

Another measure that has received a lot of attention recently is the Baltic Dry Index, a measure of the cost of shipping bulk cargo by sea, published by the Baltic Exchange in London, the leading world marketplace for brokering shipping contracts. Movements in the index can be tracked to global demand for manufactured goods.

Between June and November of 2008, the Baltic Dry Index fell by 94%, said the WTO. +