International Trade and Economic Growth
20 Nov 08
The relationship between economic growth and trade growth is helpful to consider when evaluating the impact of changes to international economic growth forecasts on future trade growth.
IHS Global Insight’s latest trade forecast has highlighted the fact that international trade cannot be de-coupled from the international financial crisis that has engulfed us. U.S. imports face their second year of negative growth, and the large Asia-to-Europe trade will shrink to a growth rate only marginally above standstill this year, with the threat of negative growth next year. The United States, Canada, Japan, and the group of countries in the European Union that use the euro as a common currency are now contracting, and a global recession is forecasted for 2009.
The GDP-Trade Relationship
Gross domestic product (GDP) forecasts have been changing in response to the rapid change in the determinants of short-term economic growth. In this environment, it may help to keep in mind some of the basic relationships between economic growth and trade as you interpret the impact of future revisions to economic growth forecasts.
Overall, changes to international trade in an economy are an amplified reaction to the dynamics of overall economic growth. When the growth of an economy is accelerating, trade growth will accelerate faster; when the growth of an economy is decelerating, trade growth will decelerate faster.
Secondary Impact: Import Costs
How significantly trade growth reacts to changes in the economy still depends on many other factors, including policy interventions, but import costs are the major secondary influence on trade growth. Import costs are a combination of the goods prices themselves plus import tariffs, foreign exchanges rate impacts, transport costs, etc.
Let us consider two recent examples. In 2003, during the recovery from the 2001 global recession, measured in real terms, worldwide GDP grew 2.7%, while the value of world trade increased 14.6%. That was because not only had economic growth accelerated from a 1.9% growth rate in 2002, but world import costs dropped 5.3% in 2003. In contrast, in 2005, world GDP growth was up to 3.5%, while world trade grew only 6.7%. That was because not only had world economic growth decelerated from a 4.0% growth rate in 2004, but also because world import costs increased 4.5% in 2005, dampening trade growth.
Total world trade is now forecasted to grow 3.6% (in tonnage terms) in 2008, compared with 4.2% in 2007. The forecast of world trade for 2008 will be slightly stronger than world GDP growth, primarily because of the 22.2 % increase in U.S. seaborne exports worldwide in 2008.
Dry bulk is projected to grow at the fastest rate in 2008—7.0%, versus 2.5% in 2007. This is due primarily to the better-than-expected growth of U.S. exports in 2008 and the fact that approximately 56% of all exports from the United States are dry bulk.
Container trade is now projected to grow at slower rates than in the last few years. In 2008, container trade will grow only 4%, compared with over 9% in 2007. Reduced consumer demand in the United States and Europe has dealt a blow to this type of trade this year. Nevertheless, in the long run, container trade will continue to be the fastest-growing service type, rising at a compound annual rate of 5.0% between 2008 and 2025.
General cargo is expected to grow 5% in 2008, slightly faster than container trade. It will be the second–fastest-growing service type, increasing at a compound annual rate of 4.2% between 2008 and 2025. Due to high crude oil prices in the first half of the year, liquid bulk will continue to be the slowest-growing service type, growing at only 1% in 2008.
For ocean trade, the resulting impact is a sharp decline in vessel capacity utilization leading to changes in operating networks, which has seen services dropped and vessels laid-up on a voyage rotation basis. Ultimately, as the overhang of new tonnage coming into the market comes about, we will see more lay-ups and probably new building cancellations as liner operators try to maintain their business and weather the storm.At recent international conferences, carriers have warned that 2008 and 2009 will be horrible years for them financially. The question will be whether all the players will survive this financial pressure. Fortunately for most of the top carriers, very few are listed on the market, with most being either family- or state-owned companies.