“The last thing the world economy needs right now is the threat of rising protectionism”
– World Trade Organization Director-General Paul Lamy
Trade has fueled economic growth over the centuries, from the gold trade in Africa to Asia’s Silk Roads to the Hanseatic League. In recent years, ever-increasing globalization has opened immense new markets in China and India and led to global supply chains.
But now we are witnessing the downside of globalization. On Sept. 20, the World Trade Organization predicted that global trade would grow a mere 2.5 percent in 2012, compared with growth of some 6 percent over the past two decades.
The reasons for the trade decline are interrelated: Europe’s recession, anemic growth in the United States and the slowing Chinese economy have all dampened exports.
Andrew Kenningham, senior global economist at Capital Economics, a London-based consulting group, said, “The problems of the advanced economies, particularly the euro zone, are being spread around the world.”
Chinese exports to the European Union have fallen 5 percent so far in 2012.
The Obama administration had established a goal, starting in 2009, of doubling exports over the next five years. If accomplished, this would have boosted U.S. manufacturing and created jobs. But this goal is unreachable now, given the bleak outlook for the world’s economies.
Tom Porcelli, chief economist at RBC Capital Markets, pointed out that, until recently, exports had been a strong driver of U.S. growth. Exports accounted for almost half of the U.S. growth since the 2009 economic recovery. Over the past four decades, exports only accounted for 12 percent of growth.
On July 6, Christine Lagarde, managing director of the International Monetary Fund, predicted that global growth will decline in the second half of 2012.
She cited weakness in investment, jobs and manufacturing in Europe, the U.S., Brazil, India and China. “The global growth outlook will be somewhat less than we anticipated just three months ago. And even that lower projection will depend on the right policy actions being taken.”
U.S. manufacturers’ new export orders declined for three straight months through August, according to a survey by the Institute for Supply Management.
The economic bellwethers of trade, UPS Inc. and Fed Ex Corp., recently downgraded their global outlooks. It is widely expected that more U.S. companies will downgrade their global growth estimates over the near term.
And the CPB Netherlands Bureau for Economic Policy Analysis, a Dutch government agency, estimated global trade was negative for June and July.
Outright declines in world trade volumes are rare. Apart from the severe 12 percent drop in 2009, total world trade declined only three other times in the past half century.
After our elections, perhaps we can stop bashing China. The recent attacks are a political crowd-pleaser but not a successful long-range economic policy.
One lesson of the Great Depression is that the adoption of restrictive trade policies is counterproductive. In 1930, the United States significantly raised import duties to protect American business and farmers. Raising tariffs prompted retaliation from foreign governments, and these “beggar-thy-neighbor” duties further hurt world economies, reducing global trade by 66 percent from 1929-1932.
On the contrary, it is imperative that key policymakers from countries and regions work together to stop the decline in the growth of global trade.
If every country produced only what it needs, it would hamper worldwide economic growth. Alternatively, international trade helps consumers acquire goods and services not available in their own countries and facilitates the goal of supply meeting demand on the most cost-efficient basis.
Originally published in the Sarasota Herald-Tribune
