World Trade: the End of the Golden Age

World Trade the End of the Golden Age

For long, world trade has more than doubled its speed in relation to the growth. In the 1990s, when gross domestic product (GDP) increased by 1 point, the merchandise trade rose by 2.2. But this beautiful mechanics was undermined since the last recession. After the 2010 rebound too quickly, promising a return to normal, the world trade in 2012-2013 entered a phase of slow growth which is likely to last.

On September 23, the World Trade Organization (WTO) has revised downward its forecast, bringing them down from 4.7% to 3.1% for 2014 and from 5.3% to 4% in 2015. At the time, the multilateral institution reviews referred to the slowdown in global growth, also found by the Organisation for Economic Co-operation and Development (OECD) and the International monetary Fund (IMF), but also by the “weak demand for imports in the first half of 2014″. “The irregularity of growth and continuing geopolitical tensions continue to pose a risk to the trade and production in the second half,” said the WTO citing tensions in Ukraine, the conflict in the Middle East and outbreak of Ebola haemorrhagic fever in West Africa.

Since then, three economists from Washington – two IMF experts, Cristina Constantinescu and Michele Ruta, and one of the World Bank, Aaditya Mattoo – returned on the causes of this development, which arouses perplexity among researchers. In an article recently published on the IMF website and to be published in December in Finance and Development, the monthly magazine of the Fund, the trio reiterates that many economists have observed the slowdown in world trade by cyclical economic factors or, more precisely, by the ongoing crisis in recent years in a European Union that is more or less a third of world trade. And in fact, several years of recession and stagnation weakened import demand in Europe. In the euro area, described as “the epicenter of the crisis,” imports declined 1.1% in 2012 and increased by just 0.3% in 2013.

However, this cyclical component would explain only part of the story. Long-term factors are also at work in this evolution. In reviewing over the last decade, the evolution of the share of imports in GDP of a number of regions and countries of the world, our three researchers observed that these ratios were stable in many economies since 2011, except in China or the United States, where they have hardly changed since 2005, so three years before the financial and economic crisis of 2008-2009. This reflects, according to them, the structural relationship between trade and growth change: from the 2000s, the trade elasticity (responsiveness) growth dropped to 1.3. In the US, it went from 3.7 to 1, and in China, 1.5 to 1.1, while it has hardly declined in Europe.

Model change

model change

How to explain this? By the evolution of networks of global supply chains, which economists, starting with Michael Porter, call the value chain. The revolution in information technology and communication (ICT) in the 1990s led to a rapid expansion of said chains, with increasing imports of parts and components in China, before the assembling of the re-export from third markets. But in early 2000, the situation changed. The share of imports of parts and components in all of China’s exports going from a peak of 60% in the mid-1990s to 35% currently.

This decline does not mean that China turned its back on globalization, but that Chinese companies rely more on domestic rather than foreign products, which supports increasing the added value of Chinese companies with their upmarket. It is also possible, according to the authors, that the coastal regions of China are better supplied than the rest of the country, the cost of transportation to the west of China have fallen faster than that of to the rest of the world.

In the United States, the 1990s were an era of offshoring and outsourcing. The share of US imports of manufactured goods has almost doubled in fifteen years, before falling to 8% and remaining at that level since the early 2000s; however, the elasticity of trade growth remained high in Europe – this can be explained by the continued expansion of value chains in Central and Eastern Europe starting from the euro zone, including Germany.

Since it is structural, and thus durable, and since it reflects the changing pattern of international production, the slowdown in global trade is expected to continue in the coming years and drive the growth down. However, the authors observe that, apart from China and the United States, there is still place in a number of regions of the world (Europe, Southeast Asia, South America) for increasing internationalization in the sector of labor. There are still many opportunities for growth in emerging economies.

South Korea faces the “China Storm”

South Korea faces the chinese storm

The economy of South Korea holds 15th position in the world, but it must adapt to changing environment in order to grow. To boost growth which is now considered “soft” (+ 3.5% in 2014 and 3.9% in 2015, after a decade to 6%), President, Park Geun-hye, passed in Parliament on October 29 mini-plan for stimulus with 14.8 million euros in additional spending to stimulate the economy. The central bank intervened several times this year. Return to balanced public accounts has been pushed back to 2017. The aging population and slowing productivity gains weaken the potential growth (long term).

Drawing the consequences of the imbalance of pensions in the public (Retirees outnumber contributors in 2017), Ms. Park proposed to gradually raise the retirement age to 65. Reform is underway. Against a background of low inflation, a ruining household debt in order to ensure the best education for their young; this debt exceeds 150% of gross domestic product (GDP). Strong won drives businesses up the wall.

The country remembers different times. Starting from scratch in August 1953 after a civil war in which 3 million people and 6 million homeless, South Korea in two generations caught up with the group of developed countries. Its GDP per capita (25,975 dollars) is comparable to that of the Europeans.

Its conglomerates (chaebols) are world leaders. You do not become number one in flat screens, giant public works or shipyards, without the resource. But some chaebols are going through difficult times.

The price of Hyundai Motor has been severely buffeted at the stock exchange after the decision of the board to spend almost 8 billion euros for the purchase of land in the district of Gangnam, Seoul, to install its new headquarters, a theme park and a shopping center. The total transaction amounting to 24 billion euros has raised questions about the governance of chaebol, led by the founding family, while President Lee Won-hee prepared to pass the baton to his son.

Eager to appease shareholders, Mr. Lee announced on October 23 that the fifth largest automaker in 2015 could pay its first interim dividend. Although South Korea is ranked 5th out of 189 countries for ease of doing business by the World Bank (“Doing Business 2014″), dividends paid by South Korean companies are notoriously low. At that point the President thinks to augment the taxation of capital.

Another chaebol going through a period of turbulence: Samsung Electronics (286,000 employees, including 71,000 researchers and 6400 PhDs in physics). First South Korean company, the world leader in consumer electronics and mobile phones, the group of development in health strategic axis. They aspire to be included in 2020 among the top five brands in the world. However, sandwiched between Apple and upmarket Chinese startups, Samsung announced in late October its worst quarterly results for the past three years.

The dependence of South Korea on China and South-East Asia is increasing. China, the leading provider and the first customer and country, absorbs 26% of South Korean exports, the countries of the Association of Southeast Asian Nations (Asean) – 15%. Bilateral trade is changing. Reduced for a long time to the role of assembly and re-export market of South Korean products, China will be an ultimate market one day. According to Arnaud Leveau, author of The Geopolitics of South Korea, the South Korean sensitivity to changes of the growth in Chinese will increase.

To deal with what the Korea Times called “China Storm” South Korea first signed free trade agreements with 47 countries, including many outside of Asia, such as the US and the European Union. It now boasts a strategic position in the center of Asia, making it a “gateway” to China. A free trade agreement with Beijing is the first big step. It abolished tariffs on 90% of goods traded between the two countries.

India: Chinese Style Growth?


Risk of poverty halved and average growth rose by more than 8% per year: 2003 to 2011 was a golden age for India but activity there slowed after a while. In 2012, the gross domestic product (GDP) grew by only 4.7% and manufacturing output fell for the first time since 1991, while the galloping inflation and the current account and fiscal deficits racked dangerously.

Since 2014, however, the Indian economy is showing signs of recovery. In the last report of the Organisation for Economic Co-operation and Development (OECD) dedicated to India, released on Wednesday, November 19, experts forecast an increase in GDP of 0.4 points to 5.4% in 2014 and 1 point to 6.6% in 2015. In 2016, only three-tenths of growth point would then separate India from China.

But for accelerating activity to last, warns OECD, the first democracy in the world with 1.23 billion people should limit the heat of its bureaucracy, continue to combat rising prices and to reduce its budget deficit, tackling bottlenecks that hinder its growth, increase the participation of women in the labor market and improve the health care system.

Mitigating imbalances

In 2013, the prospect of the end of “quantitative easing (QE)” – the program of asset purchases by the Federal Reserve (FED) in the United States – caused capital outflows in countries with emerging economy and structural impediments to growth have weakened the Indian economy. Investment and private consumption remained weak, while exports rebounded in the second half of the year after the devaluation of the national currency, rupee.

The OECD notes that in 2014, the imbalances have narrowed. The consolidation of public finances (at the federal state) went hand in hand with painful but real inflation (from 8.6% in 2011 to 6.9% this year) and with a strong decline decrease the current account deficit (- 4.2% of GDP in 2011 – 1.7% in 2014).

The ongoing reforms of the monetary policy conducted by the economist Raghuram Rajan who presides over India’s central bank (Reserve Bank of India, RBI) since September 2013, have increased confidence. Rajan, former economist, youngest of the International Monetary Fund (IMF) chief, made several increases in interest rates by the RBI, appearing determined to act on prices and inflation targeting. Moreover, the victory of the Bharatiya Janata Party (BJP) in the parliamentary elections and the appointment of Narendra Modi, former strongman of Gujarat, the post of prime minister in May 2014, put an end to political uncertainty. The outlook of entrepreneurs has improved.

The poor infrastructure, cumbersome of business environment, the complexity of tax causing multiple distortions (the establishment of an Indian VAT is still pending), inadequate education and training and outdated labor legislation weigh, according to economists at the OECD, on growth and employment.

Three years to acquire land

Improving infrastructure, including power, is vital to the industry today, nearly half of the plants suffer power cuts for more than five hours per week due to the poor quality of the network. The Twelfth Plan (2012-2017) provided a substantial increase (+1 point) for infrastructure investments, which represent 8.2% of GDP during the five years. But these investments are available in practice, it is the land ownership issues that should be overcome. Today, acquiring land in India can take up to three years.

The OECD stressed the need to boost job creation to deal with the increase in population (increase by 113 million between 2010 and 2020). The institution promotes a higher rate of female participation in the labor market. Less than a third of women of working age have a job in India. This is two times less than in Brazil. The institution finally stresses the need to improve the health system and primary care.

While noting that considerable progress that has been made (halving child mortality since 1990, longer life expectancy, loss of polio), the OECD considers it imperative to improve the system of health, develop centers of public primary health care in rural communities where the poorest live, and increase over the number of caregivers (doctors and nurses).

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  • Jeffrey

    I’ve been saying this in years, Chinese miracle is not gonna last. It is anything but stability. OK, they had their moments back in 2009, and kept the rest of the world quite mesmerized, but this is wearing out. They are slowing down already, and US has euro zone crisis already weighing down on our economy. Overestimating the role of China can have disastrous consequences…