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Cardiac arrest or dizzy spell why is world trade so weak what can policy do about it OECD Paris 21 September 2016

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Cardiac arrest or dizzy spell why is world trade so weak what can policy do about it OECD Paris 21 September 2016

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Cardiac arrest or dizzy spell why is world trade so weak what can policy do about it OECD Paris 21 September 2016

  1. 1. Cardiac Arrest or Dizzy Spell: Why is World Trade So Weak, What Can Policy Do About It? PARIS, 21 September 2016 www.oecd.org/economy/economicoutlook.htm ECOSCOPE blog: oecdecoscope.wordpress.com
  2. 2. 2 World trade growth has slowed to abnormally low rates since the crisis World trade growth % per annum 1. Average annual percentage growth. 2. Annualised quarter-on-quarter percentage growth. 3. Source: OECD Economic Outlook Database 99, OECD calculations.
  3. 3. 3 Viewed over a longer horizon, global trade intensity has stalled World trade intensity Note: Both world trade and GDP are measured at market exchange rates in constant 2010 US dollars. Trade intensity is measured as the ratio of imports plus exports to GDP. Source: OECD Economic Outlook Database 99, June 2016. 2015 = 0.2%, 2016 negative?
  4. 4. 4 Cyclical factors behind the weakness 1. Depressed demand, following the financial crisis 2. Weak investment, a trade intensive component of demand 3. Euro area weakness, a trade-intensive region
  5. 5. 5 Trade intensity usually falls after downturns… Source: Ollivaud and Schwellnus (2015), “Does the Post-Crisis Weakness of Global Trade Solely Reflect Weak Demand?”, OECD Economics Department Working Papers, No. 1216. Ratio of real trade to real GDP growth, market exchange rates
  6. 6. 6 … and investment, which is trade intensive, has been particularly weak Ratio of global investment to GDP index 2007=100 Source: OECD Economic Outlook Database No. 99; Ollivaud and Schwellnus (2015).
  7. 7. 7 In the years after the crisis, weakness in the Euro Area contributed much of the slowdown Ratio of Global import volume to global GDP volume index 2007=100 Source: OECD Economic Outlook 98 database; and OECD calculations. The recession and sluggish recovery in the euro area dragged down global growth as these countries trade heavily, mostly with each other
  8. 8. 8 Structural factors have also contributed to the trade slowdown 1. Rapid growth in Gross Value Chains has plateaued and shows signs of reversing 2. China’s trade growth is slowing due to structural change 3. Trade liberalisation has slowed and there are signs of creeping protectionism
  9. 9. 9 A Global Value Chains indicator • Measures of Global Value Chains, such as OECD TiVA, aim to capture where value-added is creating trade, looking through imports of intermediate goods and services. • As OECD TiVA data are currently only available to 2011, an indicator of GVC activity is used as a proxy to shed light on more up-to-date developments. • This indicator is the ratio of intermediate imports of goods to final domestic demand. • As commodity price movements and the cycle can influence this measure of GVCs, a structural GVC indicator is estimated to remove these effects.
  10. 10. 10 Global value chains appear to be unwinding GVC indicator average annual percentage change Having deepened over the past 20 years, a reversal in trade integration through GVCs would be worrying
  11. 11. 11 GVCs appear to be unravelling or slowing across Asia Note: Structural Indicator adjusted for price and cyclical effects. Source: Author calculations. Structural GVC Indicators average annual percentage change
  12. 12. 12 …as well as North America and Europe Note: Structural Indicator adjusted for price and cyclical effects. Source: Author calculations. Structural GVC Indicators average annual percentage change
  13. 13. 13 China’s share of world trade has been growing rapidly Source: OECD Economic Outlook Database 99, June 2016. China’s share of world trade volume
  14. 14. 14 But China is also under-going structural change which affects trade Source: Chinese customs. Growth in China has slowed in recent years The economy is rebalancing towards less-trade intensive consumption and services China is doing less assembling and producing more domestically for its final consumption
  15. 15. 15 The exceptional trade weakness in 2015 was centred in China Source: OECD Economic Outlook Database 99, June 2016 Export and import volumes in 2015 percentage change China, trade volumes, goods and services, annual 5 years change
  16. 16. 16 This has had a wider impact on the “Asian Trade Machine” Export-to-GDP ratio in volume index 2007=100 Source: OECD Economic Outlook Database 99, June 2016.
  17. 17. Overall, much of the weakness may be structural and linked to China and GVCs 17 Note: World trade and world GDP measured at market exchange rates. Source: OECD June 2016 Economic Outlook database; Fraser Institute; and OECD calculations. Change in contributions to trade intensity Impact of different factors on the ratio of exports plus imports to world GDP, % pts
  18. 18. 18 Trade policy shows signs of unravelling, but could contribute to better outcomes
  19. 19. 19 The pace of trade liberalisation has slowed and even reversed GATT/ WTO Rounds, NAFTA, EU Single Market Rising protectionism… Note: Variables 4A and 4B of the Economic Freedom of the World Index measuring tariff and non-tariff barriers. A global measure is constructed for the purposes of this paper from the individual country series using GDP weights. The index ranges from 0 to 10 and a higher value indicates a more liberal policy. Source: Fraser Institute for Economic Freedom and OECD calculations. The pace of new measures to open markets has slowed
  20. 20. The number of trade restrictions has risen sharply since 2012 20 Source: WTO-OECD-UNCTAD 2016 G20 Trade Policy Monitoring Report. Number of discriminatory trade related measures in-force since the crisis While the post-crisis trade backlash has been less severe than some anticipated, trade restrictions have increased This deterioration comes despite “stand still” commitments by the G20
  21. 21. 21 Structural reform priorities to boost trade and deepen global value chains Stop new protectionist measures and rollback existing ones Implement agreements already reached (Trade Facilitation and Trans-Pacific Partnership) Revive multilateral negotiations on new issues such as digital trade Liberalise further FDIs Conclude on-going sectorial negotiations in services
  22. 22. Boosting trade would raise growth 22 Note: Economic Freedom of the World Index global measure constructed using GDP weights. Source: Fraser Institute; and OECD calculations. Avoid new trade and investment protectionist measures Rollback protectionist measures introduced following the crisis Reduce unnecessary trade costs by: •Improving border and customs procedures, incl. implementing the trade facilitation agreement •Removing tariff and non-tariff barriers at borders •Remove regulatory restrictions on trade in services, in particular logistics •Reduce costly regulatory differences between countries Remove impediments and distortions for cross border investment Trade policy recommendations: Global index of trade liberalisation
  23. 23. 23 Removing trade restrictions would allow trade intensity to rise again World trade intensity Note: Trade intensity is measured as the ratio of imports plus exports to GDP. Baseline projection involves a modest increase in trade intensity as income convergence implies some increase in trade intensity. Alternative scenario involves all countries implementing the trade policies of the most liberal country.
  24. 24. 24 Especially via multilateral deals Increase in trade intensity from trade liberalisation percentage point increase 2017 to 2060 Source: Authors' calculations based on estimates in a panel model of world trade intensity.
  25. 25. 25 Raising trade intensity would also boost productivity World trade intensity and OECD productivity growth Note: In the baseline scenario trade intensity remains constant at its 2016 level. In the policy scenario trade intensity increases by 1.3 percentage points per annum (average from 1986-2007) from 2017. The effect of the change in trade intensity on productivity is calculated using estimates from Egert and Gal (2016). Source: Economic Outlook Database 99, Egert and Gal (2016), author calculations.
  26. 26. Public support requires gains to be shared and policy packages to be deployed 26Source: Pew Research Center. People in advanced economies are more negative about globalisation Views on trade and foreign investment, 2014 Investing in human capital and infrastructure Active labour market policies to promote skills upgrading and matching Social protection and support for workers in transition Product market reforms to promote competition and firm entry Trade policies should be accompanied by:

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