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WTO Upgrades Trade Outlook, but Warns of Risks Ahead

World Trade Organization economists have issued a strong upward revision to their forecast for 2017 trade expansion following a sharp acceleration in global trade growth in the first half of the year, but risks remain that could curtail gains.

The estimate for growth in world merchandise trade volume in 2017 was raised to 3.6% from the previous estimate of 2.4%, though this was set within a range of 1.8% to 3.6%, reflecting the high level of economic and policy uncertainty.

The new estimate puts the focus on the top end of that range. Growth of 3.6% would represent a substantial improvement on the lackluster 1.3% increase in 2016. Reflecting the continued forecast risk arising from deep uncertainty about near-term economic and policy developments, the range of estimates for world trade growth has been adjusted to 3.2% to 3.9%. Stronger growth in 2017 was attributed to a resurgence of Asian trade flows as intra-regional shipments picked up and import demand in North America recovered after stalling in 2016.

“The improved outlook for trade is welcome news, but substantial risks that threaten the world economy remain in place and could easily undermine any trade recovery,” said WTO director-general Roberto Azevêdo. “These risks include the possibility that protectionist rhetoric translates into trade restrictive actions, a worrying rise in global geopolitical tensions and a rising economic toll from natural disasters.”

Risks and rewards

“Though difficult to quantify, these risks are very real,” Azevêdo continued. “As a result, increased optimism about trade should be tempered with a healthy dose of caution. On the other hand, the fact that trade growth is now more synchronized across regions than it has been for many years could make the current expansion self-reinforcing. Such a positive outcome would be more likely if countries continue to resist the temptations of protectionism and work together with their partners in the multilateral system to ensure that gains from trade are both large and widely shared.”

The strength of the revision is partly due to a modest improvement in the consensus forecast for world gross domestic product growth. GDP growth accelerated in most major economies in the second quarter, most notably in China where quarter-on-quarter growth rose to 1.7% in the second quarter from 1.3% in the first quarter. Growth also strengthened in the U.S. to 2.6% from 1.2%.

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[Read more about global outlooks: IMF Global Outlook Strong, but Pockets of Weakness Remain]

Stronger growth in China and the U.S. boosted demand for imports, which spurred intra-Asia-trade as demand was transmitted through regional supply chains, the WTO noted.

The partial recovery of oil prices in 2017 also appears to have provided some support for investment in the U.S. The import content of investment tends to be higher than other components of GDP, so a recovery of expenditure in this area would be expected to have an outsized impact on import demand.

However, the WTO said the rapid pace of trade growth in 2017 is unlikely to be sustained next year for a number of reasons. The first is that trade growth in 2018 will not be measured against a weak base year, as is the case this year. Second, monetary policy is expected to tighten in developed countries as the Federal Reserve gradually raises interest rates in the U.S. and the European Central Bank looks to phase out quantitative easing. Third, fiscal expansion and easy credit in China are likely to be reined in to prevent the economy from overheating. All of these factors should contribute to a moderation of trade growth in 2018 to around 3.2%.

World trade rose 4.2% year-on-year in the first half of 2017 compared to the same period in the previous year. Developed economies’ exports were up 3.1% over the same period, while those of developing economies were up 5.9%. Meanwhile, imports were up 2.1% in developed countries and 6.9% in developing economies in the six months.

Regional stats

Exports and imports were up in the first half of 2017 compared to the same period last year, except for South America, where trade was essentially flat. North American exports and imports were up 4.9% and 3.9% year-on-year, respectively, during this period. Exports of South America were down 0.7%, while imports were up 1 percent. In Europe, exports grew 2.6%, while imports rose 1.2%. Exports of Asia rose 7.3%, while the region’s imports jumped 8.9% thanks in large part to strong increases in China.

A robust Chinese economic recovery has boosted import demand and stimulated trade between China and its Asian trading partners in 2017, but the pace of Chinese growth is expected to moderate progressively in 2018 and beyond. Meanwhile, other developing regions continue to stagnate. On a positive note, Brazil should see growth in its imports and GDP turn positive in 2017, but South America as a whole will continue to register weak trade and GDP growth.

Risks to the forecast are firmly tilted to the downside, the WTO said. Anticipated shifts in the stance of monetary policy in developed countries could provoke large changes in prices and exchange rates that would strongly influence international trade patterns. Renegotiation of the North American Free Trade Agreement (NAFTA) and negotiation of post-Brexit trade arrangements between the U.K. and the European Union could also unsettle global and regional trade. Rising geopolitical tensions, most notably in Asia, could have extremely negative consequences for the world economy that would be difficult to gauge in advance, and natural disasters, including hurricanes in the U.S., could have a significant but temporary impact on trade in the short run.

Over the longer term, the rebalancing of China’s economy away from manufacturing and toward services may weigh on global import demand for some time. Services, which give rise to lower demand for imports than manufacturing, have seen their share in Chinese value-added rise to 54 percent today from 43 percent in 2008. Although this rebalancing may cause Chinese imports to moderate, these changes should promote stronger and more sustainable growth in the long run, the report noted.