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

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
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
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
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
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
… 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
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
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
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
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
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
…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
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
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
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
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. 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
Trade policy shows signs of
unravelling, but could contribute
to better outcomes

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. 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
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. 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
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
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
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. 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: