November 28, 2016
Economics Group
Special Commentary
Jay H. Bryson, Global Economist
[email protected] ● (704) 410-3274
E. Harry Pershing, Economic Analyst
[email protected] ● (704) 410-3034
Downshift in Global Trade: Who Gets Hurt Most?
Executive Summary
Global trade volumes grew well in excess of global economic activity during the 1990s and the
first decade of this century, but growth in global trade has downshifted appreciably during the
current cycle. Some of this deceleration in global trade reflects sluggish growth in investment
spending in many economies, but the lack of any blockbuster trade deals in recent years as well as
the apparent topping out in the process of globalization also appears to have depressed trade
growth. Furthermore, trade growth has slowed more in developing economies than in developed
economies in the current cycle. Would the developing world benefit proportionately more than
advanced economies if growth in global trade reverted to more “normal” rates?
In this report, we decompose the sources of value added between domestic and foreign spending
in advanced and developing economies. Our analysis suggests that re-acceleration in global trade
that resulted from stronger cyclical growth in investment spending would be good news for
advanced economies as well as developing economies, but the former likely would benefit a bit
more than the latter. For developing economies to return to the strong growth rates in industrial
production (IP) and exports that they enjoyed during the past two decades, the secular forces of
globalization and the resulting segmentation of the production process likely would need to kick
in again. However, it appears that globalization may be stalling, if not reversing. In our view,
developing economies will be hard pressed to realize the robust growth rates in economic activity
and trade that they enjoyed during the past two decades, at least in the foreseeable future.
Where Has Trade Growth Downshifted More?
We return in this report to a topic that we have addressed twice over the past two years, namely,
the slow pace of growth in global trade that has characterized the current decade. 1 As shown in
Figure 1, the value of global exports shot up markedly in the years preceding the global financial
crisis. Following a sharp slump in 2009 that was induced by the global recession, the value of
global exports rebounded in 2010-2011 but then essentially stagnated in 2012-2014 before falling
by roughly $2 trillion last year. Although the collapse in commodity prices contributed to the
downturn in export values in 2015, growth in trade volumes has also been weak recently. Global
trade volumes were more or less flat on a year-ago basis in the June-August period (Figure 2).
Some of this deceleration in the volume of global trade reflects weak growth in economic activity.
There is a high degree of correlation between growth in global IP and growth in global export
volumes (Figure 2). But there is more to the slowdown in global trade growth than simply
deceleration in global economic activity. As Figure 2 makes clear, global export volumes grew well
in excess of global IP during the economic expansions of the 1990s and the past decade but the
two variables have grown more or less together during the current expansion. Indeed, global IP
and global trade have essentially stagnated this year.
1
See “Why Is Global Trade Growing So Slowly?” (August 25, 2014) and “’Vertical Trade’ and the
Slowdown in Global Growth” (August 12, 2015). These reports are available upon request.
This report is available on wellsfargo.com/economics and on Bloomberg WFRE.
Global IP and
global trade
have essentially
stagnated this
year.
Downshift in Global Trade: Who Gets Hurt Most?
November 28, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
Figure 2
Figure 1
World Export & IP Volume
Value of Global Exports
Year-over-Year Percent Change
In Trillions of USD
$20T
$20T
Total Global Exports: 2015 @ $16.4T
$16T
$16T
$12T
$12T
$8T
$8T
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
0%
-5%
-5%
-10%
$4T
$4T
-10%
-15%
-15%
World Export Volume: Sep @ 0.7%
-20%
$0T
2002
-20%
World Industrial Production: Sep @ 1.6%
$0T
1990
-25%
2014
-25%
92
94
96
98
00
02
04
06
08
10
12
14
16
Source: IHS Global Insight and Wells Fargo Securities
Developing
economies
realized outsized
growth rates in
IP and trade in
the last two
cycles.
Moreover, slowdowns in IP growth and trade growth have not been uniform across major regions
of the world in the current cycle. Figure 3 and Figure 4 consider the behavior of IP growth and
export growth in advanced economies and developing economies during the three economic
upturns that have occurred since the early 1990s. Global IP grew at an annual average rate of
roughly 3 percent between 1992 and 2000 with IP in advanced economies growing about
2 percent per annum while developing economies boasted a growth rate of 5 percent (Figure 3).
Global export volumes shot up at an annual average rate of nearly 8 percent during that cycle
(Figure 4).
Figure 3
Figure 4
Growth In Industrial Production
Growth In Export Volumes
Annual Average Growth Rate
Annual Average Growth Rate
7%
7%
10%
10%
Global
6%
Global
Advanced Economies
Developing Economies
8%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
1992-2000
Advanced Economies
6%
Developing Economies
2002-2008
2011-2015
8%
6%
6%
4%
4%
2%
2%
0%
0%
1992-2000
2002-2008
2011-2015
Source: IHS Global Insight and Wells Fargo Securities
After a modest downturn following the “tech wreck” of 2000-2001, the global economy embarked
on another upturn that ran from 2002 until the global financial crisis in 2008. During that
period, global IP grew at essentially the same rate (i.e., roughly 3 percent per annum) as it did
during the 1990s. But there was a marked difference in the IP performance between advanced
and developing economies in that cycle. Whereas IP growth in the former slowed to only
1.4 percent per annum, IP growth in the latter strengthened to 6.5 percent per annum. The export
performance of the two groups of economies differed during this period as well. Although
developing economies registered essentially the same rate of export growth in the mid-2000s
cycle as they did during the 1990s, export growth in the advanced economies downshifted by
about 3 percentage points per annum.
2
Downshift in Global Trade: Who Gets Hurt Most?
November 28, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
In short, it appears that developing economies benefitted at the expense of advanced economies
during the past decade. Some of the growth differentials in IP and export volumes between
advanced and developing economies in the last cycle may be explained by the offshoring of
production facilities to the developing world that occurred during that time.
But developing economies appear to have been disproportionately affected by slower growth in
the current cycle. Growth in global IP downshifted modestly to 2.8 percent per annum in 20112015 from 3.4 percent per annum during 2002-2008. But whereas IP in advanced economies
grew at roughly the same rate between 2011 and 2015 as it did during the last cycle, IP in the
developing world has decelerated markedly. Furthermore, the export growth rate of developing
economies has been cut in half over the past five years relative to the previous cycle. Export
growth in advanced economies has slowed but not to the same extent as it has in the developing
world.
Developing
economies
appear to have
been more
affected by
slower growth
in the current
cycle.
In sum, advanced economies and the developing world have both been hurt by the slowdown in
global trade growth in the current cycle, but it appears that the latter has been affected more
negatively than the former. So would the converse be true? That is, if global trade volumes were to
accelerate again would developing economies benefit more than advanced economy counterparts?
Who Would Benefit Most from Re-Acceleration in Global Trade?
In an attempt to answer this question we first need to understand why growth rates in global IP
and, by extension, global trade volumes have slowed in the current cycle. The International
Monetary Fund (IMF) lays most of the blame for the current weakness in global IP and global
export growth on slow growth in investment spending around the world.2 According to this
argument, acceleration in capital spending in most economies would be associated with a return
of global IP and global trade to more “normal” rates of growth.
But there appear to be factors other than slow growth in economic activity that are helping to
depress growth in global trade in the current cycle. As noted above, global trade volumes grew
well in excess of global IP during the expansions of the 1990s and the last decade. In our previous
reports, we have argued that the lack of new blockbuster trade deals and the slowing pace of
globalization have contributed to the deceleration that has occurred in global trade volumes in
recent years.3
Using a detailed database that is compiled by the Organisation for Economic Cooperation and
Development (OECD) we determined the source of value added in 28 industries in 62 economies.4
We aggregated the 28 individual industries into three broad industries: consumer goods and
services, industrial supplies and materials, a category which includes raw materials and
intermediate goods, and capital goods. We also aggregated the 62 economies into two categories:
advanced economies and developing economies. The results are shown in Table 1.
Our analysis shows that 19 percent of the value added in advanced economies in 2011 (latest
available data) was generated by final domestic demand (FDD) in foreign economies, that is, by
final spending in the rest of the world (top line, far right column). 5 The comparable ratio for the
developing world was 23.3 percent in 2011. In other words, developing economies in general
Developing
economies are
more dependent
on trade than
advanced
economies.
2
“Global Trade: What’s Behind the Slowdown?,” World Economic Outlook, International Monetary
Fund, October, 2016, p. 63-119
3 The North American Free Trade Agreement (NAFTA) was signed in 1993, and the World Trade
Organization came into being in 1995. The process of globalization led to segmentation in global supply
chains and more international trade.
4 Value added includes the wages and salaries, the profits and the rent that is paid in an economy. In
other words, it is a measure of all the income generated in an economy. We used the Trade in Value
Added (TiVA) database that is compiled by the OECD.
5 Value added in, say, the United States (an advanced economy) that was generated by spending in, say,
Germany (another advanced economy) is included in this figure. For a discussion of the effects that
developing economies have on advanced economies, see our report “Could Developing Countries Take
Down Developed Economies?” (August 21, 2015).
3
Downshift in Global Trade: Who Gets Hurt Most?
November 28, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
appear to be more dependent on foreign trade than their advanced economy counterparts, a
conclusion that is consistent with the finding that is illustrated in Figures 3 and Figures 4.
Advanced
economies
would benefit a
bit more than
developing
economies if
capital spending
was to
accelerate in
coming years.
Table 1 also shows that advanced economies probably would benefit more from acceleration in
global capital spending than would the developing world. Specifically, spending in the rest of the
world on capital goods accounts for 2.8 percent of value added in advanced economies, whereas
the comparable ratio in developing countries is 2.2 percent. Western Europe, with capital goodsproducing powerhouses such as Germany and Switzerland, and advanced Asia (Japan and South
Korea) are most dependent on capital spending in the rest of the world. If the slowdown in global
trade that has occurred in the current cycle is due largely to deceleration in investment spending,
as the IMF argues, then advanced economies would benefit a bit more than developing economies
if capital spending were to accelerate in coming years.
Table 1
Domestic Value Added Embodied in FDD
as percent of T otal Value Added
Consumer Goods
& Services
Industrial
Supplies &
Materials
Capital Goods
Total
12.2%
4.0%
2.8%
19.0%
North America
7.7%
3.1%
1.7%
12.5%
Western Europe
18.7%
4.9%
3.6%
27.2%
Advanced Asia
9.1%
4.0%
3.5%
16.5%
12.9%
9.2%
2.2%
24.3%
Emerging Europe
17.4%
9.3%
2.6%
29.3%
Emerging Asia
13.9%
5.1%
3.1%
22.2%
South & Central America
9.6%
5.3%
0.6%
15.5%
Other Developing Economies
10.2%
18.6%
0.8%
29.6%
12.5%
6.0%
2.5%
21.0%
Region
Developed Economies
Developing Economies
World
Source: Organisation for Economic Cooperation and Development and Wells Fargo Securities
As noted above, however, growth in global trade has also been supported over the past few
decades by trade liberalization and by the process of globalization. The segmentation of the
production process that has accompanied globalization means that countries export raw materials
and intermediate inputs to other countries where they are assembled into final products.
International trade in raw materials and intermediate inputs is especially important for the
developing world. As shown in the middle column in Table 1, 9.2 percent of the value added that
is generated in developing economies is accounted for by FDD in foreign economies. The
comparable ratio for advanced economies is only 4.0 percent.
The developing
world is more
dependent on
the secular
forces of
globalization.
4
Among developing economies, exports of industrial supplies and materials are especially
important for Emerging Europe (9.3 percent of value added) and “Other Developing Economies”
(18.6 percent), which includes commodity-rich countries such as Saudi Arabia and South Africa.
That said, Emerging Asia and Latin America both receive more than 5 percent of their value
added from exports of industrial supplies and materials. In short, it appears that the developing
world is more dependent on the secular forces of globalization and its positive effect on global
trade volumes than are advanced economies.
Downshift in Global Trade: Who Gets Hurt Most?
November 28, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
Conclusion
During the 1990s and the first decade of this century, global trade volumes grew well in excess of
global economic activity. Some of this robust growth in trade volumes reflects strong growth in
investment spending that occurred in many economies during this period. But blockbuster trade
deals and globalization, which led to segmentation in global supply chains, also supported this
outsized growth in trade volumes during those two decades. Growth in global trade has slowed
appreciably in the current cycle, and some of this deceleration in export volumes reflects sluggish
growth in capital spending in many economies. But globalization also appears to have hit an
inflection point, which also may be acting to depress growth in global trade.
Using an extensive database that is compiled by the OECD, we decomposed the sources of value
added between domestic and foreign spending in advanced and developing economies. Our
analysis suggests that re-acceleration in global trade that resulted from stronger cyclical growth in
investment spending would be good news for advanced economies as well as developing
economies, but the former likely would benefit a bit more than the latter. For developing
economies to return to the strong growth rates in IP and exports that they enjoyed during the past
two decades, the secular forces of globalization and the resulting segmentation of the production
process likely would need to kick in again. However, it appears that globalization may be stalling,
if not reversing. In our view, developing economies will be hard pressed to realize the robust
growth rates of the past two decades, at least in the foreseeable future.
5
Wells Fargo Securities Economics Group
Diane Schumaker-Krieg
Global Head of Research,
Economics & Strategy
(704) 410-1801
(212) 214-5070
[email protected]
John E. Silvia, Ph.D.
Chief Economist
(704) 410-3275
[email protected]
Mark Vitner
Senior Economist
(704) 410-3277
[email protected]
Jay H. Bryson, Ph.D.
Global Economist
(704) 410-3274
[email protected]
Sam Bullard
Senior Economist
(704) 410-3280
[email protected]
Nick Bennenbroek
Currency Strategist
(212) 214-5636
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Anika R. Khan
Senior Economist
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[email protected]
Eugenio J. Alemán, Ph.D.
Senior Economist
(704) 410-3273
[email protected]
Azhar Iqbal
Econometrician
(704) 410-3270
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Tim Quinlan
Senior Economist
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Eric Viloria, CFA
Currency Strategist
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Sarah House
Economist
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Michael A. Brown
Economist
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Jamie Feik
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Erik Nelson
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Economic Analyst
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Economic Analyst
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Executive Assistant
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Administrative Assistant
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