Growth in world merchandise trade should remain strong this year and next, after posting its largest increase in six years in 2017, World Trade Organization economists said in a new report.
However, that continued expansion depends on governments pursing appropriate trade, monetary and fiscal policies, backed by overall strong global economic growth, WTO economists said.
The WTO anticipates merchandise trade volume growth of 4.4% in 2018, as measured by the average of exports and imports, compared to the 4.7% increase recorded for 2017. The forecast is for that growth to moderate to 4 percent in 2019, below the average rate of 4.8% seen since 1990, but still firmly above the average of 3 percent in the years following the Great Recession of 2008-10.
There are signs that escalating trade tensions, however, could already be affecting business confidence and investment decisions, which could compromise the current outlook, according to the WTO. This refers largely to President Trump’s tariff threats against many nations and trading blocs—particularly China—and the potential for retaliatory measures should the U.S. policies be enacted.
“The strong trade growth that we are seeing today will be vital for continued economic growth and recovery and to support job creation,” WTO director-general Roberto Azevêdo, said. “However this important progress could be quickly undermined if governments resort to restrictive trade policies, especially in a tit-for-tat process that could lead to an unmanageable escalation. A cycle of retaliation is the last thing the world economy needs. The pressing trade problems confronting WTO members is best tackled through collective action. I urge governments to show restraint and settle their differences through dialogue and serious engagement.”
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The recently released April “World Forecast Flash” from Global Insight written by IHS Markit chief economist Nariman Behravesh and executive director of global economics Sara Johnson, said, “Even a limited tariff war could begin to wear down global economic growth. The magnitude of the tariffs being considered, so far, will have a limited effect on overall growth, but the impact on global supply chains and specific industries could be significant.”
The economists said a trade conflict could weigh heavily on financial markets and business investment plans.
“Recent evidence suggests business sentiment is beginning to erode, in part because of trade disputes,” they noted. “The good news is with growth momentum strong, the situation would need to become a lot worse before it would seriously threaten the global recovery.”
Another major risk in the outlook is a potential rise in inflation in one or more key countries, which could cause monetary authorities to raise interest rates precipitously and lead to slowed economic growth, with negative consequences for trade, according to the WTO. The U.S. Federal Reserve is in the process of raising interest rates closer to historical norms, while the European Central Bank is moving closer to phasing out its stimulus measures. Economic forecasters generally expect monetary authorities to manage these challenges successfully, the report noted, “but with less room to maneuver some financial volatility could come to the fore if conditions change.”
Trade volume growth in 2017, the strongest since 2011, was driven primarily by increased investment and consumption expenditure. Merchandise exports grew 10.7% and commercial services exports increased 7.4%, reflecting increasing quantities and rising prices. The WTO did note that merchandise trade volume growth was somewhat inflated by the weakness of trade over the previous two years, providing a lower base for the current expansion.
Regarding trade policy and its impact on the forecast, the WTO said, “Increased use of restrictive trade policy measures and the uncertainty they bring to businesses and consumers could produce cycles of retaliation that would weigh heavily on global trade and output. Faster monetary tightening by central banks could also trigger fluctuations in exchange rates and capital flows that could be equally disruptive to trade flows.”
In addition, heightened geopolitical tensions could reduce trade flows, while technological change could result in more cyber attacks, which could affect services trade as much, or even more than trade in goods.
On the positive side, since all regions are experiencing upswings in trade and output at the same time, this could also make recovery more self-sustaining, the report noted.
Despite the improved outlook, some structural factors that put downward pressure on trade in recent years remain, including things like the rebalancing of the Chinese economy away from investment and toward consumption, as well as the reduced pace of global trade liberalization.
Early data analysis points to trade getting off to a strong start in 2018. The WTO’s most recent World Trade Outlook Indicator cited above-trend trade growth in the first quarter, while other indicators such as export orders and container shipping also suggest an ongoing recovery.
World merchandise trade volume grew 4.7% in 2017 from 1.8% in 2016, with rising import demand across regions, most notably in Asia. It was also shared across regions, especially on the export side, where North America, South and Central America and the Caribbean, Europe and Asia all recorded stronger growth. Asia and North America saw steady year-on-year growth in imports throughout 2017, whereas import growth accelerated over the course of the year in Europe to 4.1% in the second half from 1.4% in the first half. The same held true for South and Central America and the Caribbean, where second half growth of 6.6% outpaced first half gains of 1.5%.
Asia had the fastest trade volume growth of any region in 2017, with exports increasing 6.7% and imports expanding 9.6% following two years of mild expansion. North American exports rebounded in 2017 after a stagnant 2016, with growth of 4.2%, while imports ticked up 4 percent, the report noted. Import growth for South and Central America and the Caribbean increased 4 percent last year following three years of steep declines, and European trade flows rose moderately, with a 3.5% gain in exports and a 2.5% rise in imports.
The report noted that exchange rates and commodity prices strongly influence dollar values of international trade flows. The nominal effective exchange rate of the dollar against a broad basket of currencies, despite some short-term fluctuations, was virtually unchanged in 2017, while prices for energy, food, raw materials and metals rose 7 percent to 24 percent.
This partly explains why merchandise trade growth was stronger in value terms than in volume terms for the year. The dollar value of world merchandise exports was up 11 percent in 2017 to $17.2 trillion, while world commercial services exports increased 7 percent to $5.25 trillion.