International trade may be headed for a new era

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

30 Sep 2008

With the collapse of the World Trade Organization’s Doha Development Round of trade negotiations in July, we may be headed to a more protectionist future with lower trade growth. While this may be the case, there are also some fundamental short- and long-term factors that have caused Global Insight to have a gloomier view on international trade growth in the future.
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. In percentage terms, the 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 as well on both sides of the Atlantic.
The massive growth in U.S. exports that has been reported as a strength is 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. The U.S. downturn caused trans-Pacific trade volumes to decline 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.
The Asia-to-Europe trades continued to boom through most of fourth-quarter 2007. It is now clear that European consumers, particularly those in the U.K., are reacting no differently from Americans. The Asia-Europe trade is being severely affected and we are just at the beginning of a significant slowdown, with this trade expected to actually decrease this year.
The development of the world economy and trade in the past one-and-a-half decades has been characterized by economic globalization. Manufacturing has moved from developed countries to developing countries, because both labor and environmental protection costs are lower in developing countries. Before globalization, most goods were produced at locations near the end markets. After globalization, much of the production is concentrated in low-cost locations that are far from the end markets. As a result, in the past one-and-a-half decades, we have seen rapid growth of international trade.
Economic globalization has considerably increased energy consumption in two ways. First, it substantially increased the demand for world freight transportation. Secondly, it 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, then world consumer energy consumption will be doubled, not to mention the billions of people still aspiring to this lifestyle. 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 mechanism work. Earlier this year, China reduced subsidies for fuel consumption, increasing gas and diesel prices by 17 to 18 percent.
Higher prices will discourage consumption, and world oil prices dropped $2 a barrel at the time of the announcement. The elimination of subsidies by all countries to discourage consumption would either 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 now outweigh the value of the goods themselves.
If fuel prices continue to rise, it may make it unprofitable for China to continue to import iron ore and coal from overseas, with other countries making and exporting more steel and exporting less coal and ore to China.
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 as China. High transportation costs will deter additional 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, depending on which has the larger transportation volume and expense: the input materials transportation or the final product shipments.
These factors are influencing changes in world trade flows in the face of high fuel costs. The strong expansion of world trade that we have seen has helped to reduce the difference in wage rates and returns on capital between countries. This is what is called factor price equalization in international trade theory, and we are seeing evidence of this at work in world markets today.
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 down, if some production reverts to domestic manufacturing.
While we will, of course, see a cyclical rebound in trade once the economies of North America and Europe rebound, longer-term forces will be leading us into an era of slower growth in international trade.

Source: Shipping Digest