TWN Info Service on WTO and Trade Issues (Apr17/09)
19 April 2017
Third World Network
       
World trade to grow 2.4% in 2017, but uncertainties abound
Published in SUNS #8443 dated 13 April 2017

Geneva, 12 Apr (Kanaga Raja) - World merchandise trade in volume terms is forecast to grow 2.4% in 2017, up from a very weak 1.3% in 2016, the World Trade Organisation (WTO) said on Wednesday.

In their latest trade statistics and outlook, the WTO economists said growth in the volume of world merchandise trade is expected to rebound this year from its tepid performance in 2016, but only if the global economy recovers as expected and governments pursue the right policy mix.

The WTO is forecasting that global trade will expand by 2.4% in 2017. However, as deep uncertainty about near- term economic and policy developments raise the forecast risk, this figure is placed within a range of 1.8% to 3.6%.

In 2018, the WTO is forecasting trade growth between 2.1% and 4%.

At a media briefing on Wednesday, WTO Director-General Roberto Azevedo said that the poor performance in 2016 was largely due to a significant slowdown in emerging markets where imports basically stagnated - barely growing in volume terms last year.

As for the outlook in 2017 and beyond, the DG said that a number of early indicators point to a recovery in trade growth in 2017.

For example, container port throughput has climbed to a record high. World export orders are at their highest level in several years. And these factors combined with an expected recovery in global GDP gives some cause for "cautious optimism," he said.

The WTO therefore expects world trade to rebound to 2.4% in 2017. However, because of the high level of economic and policy uncertainty, "we are placing this figure within a range that goes from 1.8% to 3.6%."

Overall, said Azevedo, "I think that while there are some reasons for cautious optimism, trade growth remains fragile and there are considerable risks on the downside."

"And much of the uncertainty around the outlook is of course political, but not only geo-political. Part of this is also people's concerns about the impact that trade can have and the fact that trade plays a very beneficial role in the economy overall it is of course a net positive. It drives growth, job creation, development but nonetheless people's concerns cannot be ignored."

Finding the right response to this means that "we have to look at the whole picture. The fact that the economy is changing fast, driven by technology and innovation, is undeniable. Eight in ten manufacturing jobs are lost to innovative technologies and higher productivity," he maintained.

He added that it is estimated that 65% of children that are entering primary school today will end up working in types of jobs that don't exist yet.

"So we have to adapt to this new reality. Adapt means apply the right mix of policies in a wide range of areas. At the domestic level, policies are needed to help support the workers of today and also to train the workers of tomorrow."

Closing the borders to trade will only worsen the situation, said Azevedo. It would not bring jobs back. It would just make more jobs disappear.

"So we need to keep using trade to deliver more benefits to more people. More trade integration can help make the system more inclusive, connecting new industries and smaller players to new markets."

Asked how much the Trump administration's policies account for the overall policy uncertainty and whether there has been any clarity from the US administration on its willingness to engage with the WTO, Azevedo said "we are waiting to see the new trade team really in place - waiting for the new USTR to be confirmed so that we can have a more meaningful dialogue."

"At this point in time, we don't have that, and we are still waiting to see how the trade policy itself is going to shape up in the United States."

Referring to a graph in the report highlighting global policy uncertainty from January 2014-February 2017, the DG said that this graph is going up markedly particularly since 2016.

A bunch of not very numerical elements go into that graph, but a lot of it has to do with analysis of articles by the press where the word "uncertainty" (appears) or where the piece itself is about question marks on the future of fiscal, monetary, or trade policies. All those things combined show in that graph that the level of uncertainty is going up, he pointed out.

According to the DG, it could be for a number of reasons - elections, volatility in financial markets, and question marks about the future of fiscal policy and monetary policy in major markets.

That does not mean that it is all negative. Uncertainty can also be a good uncertainty because, for example, investors might be expecting interest rates to go down, which is good for them. It simply means that they will hold their investment until that uncertainty is cleared up.

"What we need today is stability. What we need today is predictability."

Asked how the Trump administration's statements on imposing tariffs and trade barriers will affect the trade forecast, Azevedo said that he has heard a number of comments on the part of authorities connected to the new administration. Some were going in a particular direction and others were going in a slightly different direction.

As far as trade and the WTO are concerned, the DG said, "the devil is in the detail. Just an overall statement of intentions to go in one particular way or another, doesn't tell us what the trade policy is and it doesn't tell us what the impact of that trade policy will be on trade relations among WTO members."

"So we need more details. We need more clarity and I suppose that will come when we have the new trade team in place. We don't have that now, so anything I say about the impact of the US trade policy would be speculation. And I am not keen on speculating."

The DG was asked about the fact that he had commented (before the results of the referendum were known) that Brexit would be bad for Britain but that his position vis-a-vis the United States is somewhat ambiguous in that he has said that details (of Trump's trade policies) have not emerged. He was asked to comment on the apparent double standards when it comes to the US where he is being extremely cautious, but that he had pronounced his view on Brexit even before the results of the referendum in Britain were known.

Azevedo said "my standard is very clear. It is the way I see it. That's the only standard that I apply. And I don't take back anything that I said about Brexit. And I don't take back anything that I said about the new administration in the United States."

On Brexit, at the time, he had said that "uncertainty is bad, and I just said that today, again. Uncertainty is bad. That's what I said at the time and I keep repeating it now. Now it's done, it's been decided by the British people."

"I have said before, and I will say it again, the less turbulence we have in this process the better for the global economy. And as far as the WTO is concerned, we will try to ensure, as much as we can, less turbulence."

On the US, Azevedo maintained that there was no ambiguity at all in what he said. "I've said it before and I will say it again. I don't have an interlocutor in the US. I don't know what the trade policy is. And I haven't read any piece in the press, or analysts or economists or politicians, telling me what the US trade policy is. I just don't know and I don't think anybody does at this point in time. So we have to be patient. We have to see what the trade policy is."

In their report, the WTO economists said the unpredictable direction of the global economy in the near term and the lack of clarity about government action on monetary, fiscal and trade policies raise the risk that trade activity will be stifled.

"A spike in inflation leading to higher interest rates, tighter fiscal policies and the imposition of measures to curtail trade could all undermine higher trade growth over the next two years."

According to the WTO economists, the WTO's more promising forecasts for 2017 and 2018 are predicated on certain assumptions and there is considerable downside risk that expansion will fall short of these estimates.

Attaining these rates of growth depends to a large degree on global GDP expansion in line with forecasts of 2.7% this year and 2.8% next year. While there are reasonable expectations that such growth could be achieved, expansion along these lines would represent a significant improvement on the 2.3% GDP growth in 2016.

In 2016, the weak trade growth of just 1.3% was partly due to cyclical factors as economic activity slowed across the board, but it also reflected deeper structural changes in the relationship between trade and economic output.

The most trade-intensive components of global demand were particularly weak last year as investment spending slumped in the United States and as China continued to rebalance its economy away from investment and toward consumption, dampening import demand.

"Global economic growth has been unbalanced since the financial crisis, but for the first time in several years all regions of the world economy should experience a synchronized upturn in 2017. This could reinforce growth and provide an additional boost to trade."

The report noted that forward looking indicators, including the WTO's World Trade Outlook Indicator, point to stronger trade growth in the first half of 2017, but policy shocks could easily undermine positive recent trends.

Unexpected inflation could force central banks to tighten monetary policy faster than they would like, under-cutting economic growth and trade in the short-run. Other factors, such as the uncertainty provoked by the United Kingdom's withdrawal from the European Union could potentially have an effect.

Meanwhile, the possibility of a rise in the application of restrictive trade policies could affect demand and investment flows, and cut economic growth over the medium-to-long term.

"In light of these factors, there is a significant risk that trade expansion in 2017 will fall into the lower end of the range," said the WTO economists.

The recovery of world trade this year and next is based on expected world real GDP growth at market exchange rates of 2.7% in 2017 and 2.8% in 2018. This GDP estimate assumes that developed economies maintain generally expansionary monetary and fiscal policies, and that developing economies continue to emerge from their recent slowdown.

The unusually low 1.3% growth in world merchandise trade volume in 2016 was the result of several risk factors converging over the course of the year. These weighed on imports of both developed and developing economies, although the latter were more affected.

Developing economies suffered a sharp 3% decline in imports in the first quarter, equivalent to an annualized drop of 11.6%, but growth resumed in the second quarter and losses were recovered by the end of the year.

Meanwhile, imports of developed economies continued to grow but at a reduced pace. The weakness of imports was reflected on the export side in slow growth of shipments from both developed and developing countries.

For the year, imports of developed countries grew 2.0% while those of developing economies stagnated at 0.2%. Exports recorded modest growth in both developed and developing countries: 1.4% in the former and 1.3% in the latter.

Geographic regions were affected to varying degrees by the slump in trade in 2016. The first quarter was characterized by financial turbulence that affected China and its regional trading partners, as fears of an economic hard-landing and currency depreciation increased.

Declines in imports of South America and Other regions (comprising Africa, the Middle East and the Commonwealth of Independent States) were steeper and more persistent, driven mostly by low commodity prices. Much of South America's decline was due to Brazil, which remained mired in a severe recession.

Meanwhile, Europe's exports and imports grew faster than North America's, which have been mostly flat since the start of 2015.

According to the report, despite positive growth in its exports and imports, North America was one of the biggest contributors to the weakness of world imports in 2016.

In 2015, North American imports added 1.2 percentage points to world import growth of 2.9%, or 42% of the total increase.

By contrast, the region only contributed 0.1 percentage points to world import growth of 1.2% last year.

Asia and Europe were the only regions making significant positive contributions to global import demand in 2016, with Europe contributing 1.6 percentage points (39% of the total increase) and Asia adding 1.9 percentage points (49% of the total).

Reasons for the lacklustre performance of North America's trade are multi-faceted, but they include low oil prices and declining rates of investment, particularly in the energy sector. Investment made essentially no positive contribution to GDP growth in the United States in 2016.

Investment is the most import intensive component of GDP and has been particularly weak in developed countries since the financial crisis, with sharp contractions in Europe in 2012 and 2013 during the sovereign debt crisis.

The contribution of investment to China's economic growth has also declined, albeit more gradually. Investment accounted for more than half of China's GDP growth in 2012-13, but by 2016 this had fallen to 39%.

WTO economists said that commodity prices and exchange rates played a large role in the disappointing trade performance of 2016.

"Plunging prices for oil and metals since the middle of 2014 deprived resource exporting regions of revenue to purchase imports. Commodity prices have stabilized and staged a partial recovery, but a return to price levels of a few years ago is unlikely as long as oil inventories remain high and the US dollar remains strong."

Dollar values of international trade flows have been strongly influenced by exchange rates in recent years. In 2016, world merchandise exports were valued at US$15.46 trillion, down 3.3% from the previous year.

TRADE OUTLOOK FOR 2017 and 2018

According to the WTO economists, leading indicators of real trade growth are up in the early months of 2017, suggesting a strengthening of trade at the start of this year.

Container throughput of major ports has recovered from its slump of 2015-16 to reach a record high level, with year-on-year growth of 5.2% in the first two months of 2017.

Estimates of world GDP growth at market exchange rates have risen from 2.3% in 2016 to 2.7% in 2017 and 2.8% in 2018.

"Balanced against these positive indications are a number of clear and significant risks. Growing anti- globalization sentiment and the rise of populist political movements have increased the likelihood that restrictive trade measures will be employed more widely."

Narrowly targeted measures would probably not have an appreciable impact on world trade and output, but across-the-board measures or abandonment of existing trade agreements could damage consumer and business confidence and undermine international trade and investment, said the WTO economists.

With inflationary pressures building gradually in developed countries, central banks could also accelerate their pace of monetary tightening, with negative consequences for economic growth and trade in the short-run.

Changes in fiscal policy could also have unintended international consequences that could reduce global economic activity and trade.

In Europe, the challenging negotiations between the United Kingdom and the rest of the European Union will increase uncertainty about the shape of their trade relations in the future. Sovereign debt in highly indebted EU countries is still an outstanding issue that may come to the fore once again over the next two years, they said.

"Assuming that developed economies maintain generally accommodative fiscal and monetary policies, that economic recovery in emerging economies proceeds gradually, and that restrictive trade measures do not proliferate, we would expect merchandise trade to grow 2.4% in volume terms in 2017."

However, given the significant downside risks and the prolonged period of weak trade growth in recent years, this growth is placed within a range of 1.8% to 3.6%.

"World trade growth could be as low as 1.8% in 2017 if downside risks emerge, or it could be as high as 3.6% if our basic assumptions are too pessimistic, but the upside potential is less likely. In 2018 trade volume growth should be between 2.1% and 4.0%," said the WTO economists.