Gene Kindberg-Hanlon and David Young.
The volume of world trade is now 17% below where it would be had it grown at pre-crisis trend after 2011. This post argues that most of this gap can be explained by weakness in world GDP, but stalling expansion in global value chains (GVCs) is playing an increasingly important role. We also argue that this shortfall can’t be explained by shifts in the geographical or the expenditure split of global GDP growth. While world trade grew twice as quickly as world GDP pre-crisis, it is likely to grow at about the same rate as world GDP in the future. This matters: weak trade could explain half of the 1pp fall in annual global productivity growth since the crisis.
Before the crisis world trade tended to grow around twice as quickly as world GDP, but since 2012 trade growth has simply matched that of GDP. So what explains this weakness? Contrary to some other economists, this post finds no evidence that factors such as slowing growth of supply chains or the expenditure split of demand can explain the weakness relative to GDP. Instead, it is due to the changing composition of global activity: over time a greater share of world activity has been accounted for by countries whose imports grow more slowly relative to GDP. These trends are likely to continue, such that world trade is likely to grow more slowly relative to GDP than in the past.