New era for global trade?

New era for global trade?

With the collapse of the World Trade Organization's Doha Round of trade negotiations in July, we may be headed to a more protectionist future with lower trade growth. There are also some fundamental short- and long-term factors that support a gloomier outlook for international trade growth.

From a short-term perspective, the U.S. credit crunch and subsequent downturn is having a global impact. Asian exports are growing more slowly than in 2007. Percentage growth in liner trade will only be half of what it was in 2006. The European slowdown is well under way, and it can be expected that 2009 will remain soft on both sides of the Atlantic.

Growth in U.S. exports has been based on low-value goods such as scrap metal and agricultural produce, subsidized not only by the government, but also by the collapsing dollar.

The decline in trans-Pacific trade began in the first quarter of 2007 as American consumers began to lose confidence and reduce their purchases. Trans-Pacific trade volume declined from nearly 10 percent growth in 2006 to only 2.2 percent in 2007 to North America as a whole. It will be negative this year.

European consumers, particularly those in the U.K., are reacting no differently than Americans. Booming through 2007, the Asia-Europe trade is now at the beginning of a significant slowdown, with trade expected to decrease this year.

The development of the world economy and trade in the past 15 years has been characterized by economic globalization, with manufacturing shifting from developed countries to developing countries. With much production now concentrated in low-cost locations far from the end markets, international trade has grown rapidly.

Economic globalization has considerably increased energy consumption in two ways. It has substantially increased the demand for world freight transportation, and has helped promote an energy-consuming lifestyle all over the world. In developed countries, low-cost imports have allowed more people to afford automobiles, air-conditioned homes with many electrical appliances, and global travel.

In developing countries, exports have brought wealth to a small portion of the population who can then pursue Western lifestyles. If just 30 percent of the Chinese and Indian populations reach Western levels of consumption, world consumer energy consumption will double. So long-term energy price increases are not surprising.

Left to operate, global market competition will see energy prices at the level where they effectively suppress energy consumption to meet supply. The recent decline in prices confirms this is happening. Developed countries are calling for developing countries to remove subsidies for energy consumption to let the market work.

Earlier this year, China reduced subsidies for fuel consumption, increasing gas and diesel prices by 17 to 18 percent, and world oil prices dropped $2 a barrel. Elimination of subsidies by all countries to discourage consumption would result in lower oil prices or at least mitigate the increases.

High fuel prices have considerably increased shipping costs. For high-value and lightweight goods such as electronics, shipping costs are still bearable. For low-value and heavy goods such as iron ore, shipping costs can outweigh the value of the goods.

With wage rates rising and the Chinese currency appreciating, some investors are considering moving manufacturing to other countries with lower costs, such as Vietnam. With high oil prices and the depreciated U.S. dollar causing worldwide price inflation, the increased costs of imported materials have overcome the savings from the difference in wage rates for some manufacturing.

Furthermore, Vietnam is just as far as China from the markets of the most-developed countries. High transportation costs will deter manufacturers from establishing production facilities in locations that are too far away from their end markets.

High transportation costs may force manufacturers to relocate production facilities closer to material suppliers or consumption markets.

These factors are influencing changes in trade flows in the face of high fuel costs. The strong expansion of trade that we have seen has helped to reduce the difference in wage rates and returns on capital between countries.

This makes some export manufacturing no longer profitable in developing countries. When more goods are produced at locations closer to their end markets, overall world trade growth may slow, if some production reverts to domestic manufacturing.