October 2018

In response to continuing emerging market demand, the world order of trade as we know it is changing. But this is no longer just about merchandise – services trade has taken off with significant flows into emerging Asia. Dr Rebecca Harding charts the sea-change

During the past 12 months, trade has been at the front of everyone’s mind for two reasons. First, during 2017 it looked as if the world was pulling out of its post-financial crisis trade torpor. The International Monetary Fund (IMF) World Economic Outlook for April 2018 showed a positive picture of export volume and GDP growth, with export volumes growing year-on-year at a rate higher than GDP growth for the first time since 2012. The ICC Trade Survey, on the back of this, made clear the view that “trade is on its way to its familiar, pre-crisis position as the engine of global GDP growth” (see Figure 1).1

Second, the spectre of trade wars and protectionism, that has hung over the trade sector, shows no sign of diminishing in importance into 2019.2

As I noted in the H1 2018 issue of flow, while politics dominates the institutions and frameworks of trade in the way it is doing at the moment, there is an ongoing risk that the economic and business benefits derived from trade are weakened.

Changing nature of trade

Arguably, the issues that have provoked economic nationalism in the US and retaliatory measures elsewhere 3  are symptomatic of the changing nature
of trade itself:

  • The balance of trade power has shifted markedly towards emerging economies, particularly South Korea and China.
  • If power is rebalancing, this in itself is a threat to the established order, and to established institutions such as the World Trade Organisation (WTO).
  • Goods trade, for example in electronic goods, contains a substantial amount of intellectual property, meaning that the lines are increasingly blurred between goods that are purely civilian in purpose and goods that also have a military or security application.
  • Services trade is increasingly embedded in goods trade (through manufacturing as a service, for example) and part of increasingly sophisticated supply chains. Digital trade, while relatively small in terms of its take-up at present, is growing in importance but is not measured in terms of size or volumes in any meaningful way.

There is little doubt that the tectonic plates of trade are shifting, and, indeed, have been shifting for some time (see Figure 2). If we look just at values of trade rather than at volumes, then we can see more clearly what is going on.

In 2006, the value of trade in services was just 20% of the value of trade in goods. By the end of 2017, services were 30% of the value of world trade in goods. Both goods trade and services trade fell back between 2014 and 2015 but, while services trade has gathered pace since, goods trade has continued to decline in value terms.

Of course, some of this is simply because lower commodity prices have dampened the values of goods trade. However, it is clear that much of the increase in trade that was reported by the WTO and the IMF in 2017 was due to services picking up rather than goods.

It is also the case that the biggest trading nations in the developed world retain their influence over services-trade compared with, say, China (see Figure 3).

The top six services trading nations account for more than 50% of world imports and exports. The US is clearly the largest, with exports worth US$880bn in 2017. This is more than twice the level of the UK’s US$320bn or China’s US$295bn of exports. China has the largest trade deficit in services, although it has a trade surplus in goods, and even though Germany has the world’s largest goods trade surplus, it still has a deficit in services.

Services

When it comes to services, there is a far greater dependency of China on the US: the US exports around US$60bn of known services to China. This is just over 20% of China’s total imports of services and has been growing at an annualised rate of nearly 9% since the financial crisis. To some extent this represents the integration of the Chinese economy into the global economic system since the crisis, as more banks and service organisations moved to China to take advantage of the rapid recovery in emerging Asia between 2010 and 2013.

"There is every reason to be hopeful about trade patterns across the world"

The high levels of annualised growth since 2011 are indicative of an emerging economy with very little by way of imports to start with, and that has grown very rapidly over the period. Projected rates of growth are more modest, at between 1% and 6% for each of the top 10 sectors to 2021. Service imports from the US have grown overall at just over 14% and are projected to continue their growth over the next few years at 5% annualised to 2021.

US$60bn
The value of services the US exports to China

But what is more interesting from the chart is the actual sectors themselves. The chart presents the 10 fastest-growing sectors over the past five years. While the tariffs on iron and steel have been hitting the headlines, fewer inches seem to be given to the consumption of government services (including military services), research and development, not to mention intellectual property imports from the US. Outflows of services look set to continue their upward trajectory.

While the US is important to China, it faces the risk of a slowdown in Chinese appetite for US goods and services as China becomes more self sufficient, and hones its own expertise.

No room for nationalism

Despite some of the recent headwinds, there is every reason to be hopeful about trade patterns across the world. Practitioners in the sector have long been aware of the fact that global trade in goods and services means greater inter-dependency, both of ideas and intellectual property, and also of security. The biggest risk to the sector as we move into 2019 is that economic nationalism fails to acknowledge this reality. Trade in services is characteristic of the challenges that are faced because so much know-how, which is easier to transfer and tailor, is packaged into the products. We cannot turn back the clock: as digital trade grows, this will become more important, not less. Maybe this is the time for a little realpolitik in international trade negotiations.

Dr Rebecca Harding is an independent trade economist and former Chief Economist of the BBA. She is the Founder and CEO of Coriolis

________________________________

Sources
1 See https://bit.ly/2sFshjT at db.com
2 See ‘Born in the USA’ at https://bit.ly/2OvHMoD at db.com
3 See https://bit.ly/2mXcNVL at db.com

Rebecca Harding

Independent trade economist and former Chief Economist of the BBA | Founder and CEO of Coriolis

Rebecca Harding

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