FX International Payments
By Frances Coppola
But the Eurozone is now recovering – slowly – and oil prices are at historic lows. Despite market turmoil and political unrest, Western economies seem to be climbing out of the slough of despond that has gripped them since 2008. Yet world trade has not recovered. Indeed, according to researchers Simon J. Evenitt and Johannes Fritz, it has reached an unprecedented plateau.
“World export volumes reached a plateau at the start of January 2015. The standard measure of world trade isn’t slowing down – it is not growing at all,” they say. “Except during global recessions, a plateau lasting 15 months is practically unheard of since the Berlin Wall fell.”2
That event was in 1989. It brought to an end the Cold War, the standoff between the USA and the USSR that had dominated global politics since the 1950s. The ensuing collapse and dissolution of the USSR disrupted international business relationships and helped to enable – among other things – the rise of China as a global power. And the reunification of Germany and the gradual absorption of the USSR’s former allies into the growing European Union radically changed the face of Europe. As a result of the fall of the Berlin Wall, the world is now dominated by three major trading blocs.
Evenitt & Fritz suggest that the world may have reached another similar turning point. Their research shows that world trade simply has stopped growing. Emerging and developed markets are equally affected.
Evenitt & Fritz dismiss the falls in oil and commodity prices since 2014 as a principal cause of global trade stagnation. They say that falling commodity prices could not have accounted for the majority of the fall in the value of global trade in 2015, and point out that in fact, raw materials trade recovered partially in the fourth quarter of 2015. Their findings, summarized here, point to a different cause:3
Evenitt and Fritz ascribe the stagnation of world trade to rising protectionism, particularly in developing countries:4
If Evenitt & Fritz are right, exporters are facing increased barriers to trade. And the barriers themselves seem to have changed. “Before world trade plateaued duties for dumping, subsidisation, and import surges were used most—during the plateau trade-distorting bailouts and financial assistance were number one,” say the researchers. “Since global trade plateaued another trade restriction – export taxes – were used less and requirements on investors to source locally imposed more often. In short, the policy mix used by governments appears to have shifted once trade plateaued, suggesting trade policy dynamics have evolved as well.”
Recent turmoil in steel markets culminating in tit-for-tat imposition of tariffs by the US and China have contributed to this, of course. But the researchers find that protectionism in steel production has in fact been rising since 2010: “Our report shows that protectionism in this sector has been ratcheting up since 2010 and, while so much attention is focused on tariffs targeting dumped steel, in fact, state incentives to promote steel exports are a far larger systemic problem.”
And they go on to discuss other, more subtle forms of protectionism. For example, exporters are experiencing enforced shortening of supply chains due to regulatory requirements to source locally. Many firms have announced plans to localize production.
Facebook’s CEO, Mark Zuckerberg, observes that the world is becoming more protectionist. “I hear fearful voices calling for building walls and distancing people they label as others, for blocking free expression, for slowing immigration, reducing trade and, in some cases around the world, even cutting access to the internet”, he says.5
Of course, businesses are adapting to more fragmented markets. The CEO of General Electric commented, ““A localization strategy can’t be shut down by protectionist politics.”6 Liberalization of global trade finance and International Payments is making trading across borders faster, less costly and easier to manage, helping to offset the deadening effect of rising tariff and non-tariff barriers to trade. And the researchers note that international businesses often react to rising protectionism by substituting foreign direct investment for trade.
The researchers foresee what they describe as a “21st-century form of mercantilism”, in which governments actively compete for talent, foreign direct investment, research and development hubs, and intellectual property across a wide range of industries.
Despite growing emphasis on local production and protected markets, innovations in trade finance and international payments could help global trade volumes and value to recover, to the benefit of businesses and consumers around the world. But if the “new mercantilism” becomes a global game of beggar-my-neighbour, with governments aiming to seize from each other a larger share of a stagnant global pie, that would be concerning for future growth and prosperity.
With 17 years experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.
3. 19th Global Trade Alert, op. cit. (ii)
4. 19th Global Trade Alert, op. cit. (ii)
5. Quoted in 19th Global Trade Alert, op. cit. (ii)
6. Quoted in 19th Global Trade Alert, op. cit. (ii)