WTO: Dire Straits for Trade

The global merchandise trade finds itself in dire straits due to a slump in manufacturing. Growth has been adjusted down to 0.8 percent for this year, which is less than half of the 1.7 percent increase projected in April. This information comes from figures released by the World Trade Organization’s economists this week.

Despite erratic trends in global trade, the WTO's economists maintain that the growth projection of 3.3 percent for 2024 remains unchanged.

In a press release issued yesterday, the WTO anticipates that the real-world gross domestic product will expand by 2.6 percent at market exchange rates in 2023, and by 2.5 percent in 2024. These projections are outlined in the WTO’s “Global Trade Outlook and Statistics- Update: October 2023.”

In a turbulent global economy, where short and medium-term uncertainties seem commonplace, the WTO predicts, "Trade growth should rebound next year, accompanied by slow but stable GDP growth." The organization further states that sectors more sensitive to business cycles should stabilize and recover as inflation moderates and interest rates begin to decrease. However, there are emerging signs of supply chain fragmentation, which could jeopardize the relatively positive outlook for 2024.

Impact of Supply Chains

According to the press release, “The share of intermediate goods in world trade, an indicator of global supply chain activity, fell to 48.5% in the first half of 2023. This is compared to an average of 51.0% over the prior three years. Additionally, the share of Asian bilateral partners in US trade in parts and accessories – a crucial subset of intermediate inputs – decreased to 38% in the first half of 2023, down from 43% during the same period in 2022."

“The projected slowdown in trade for 2023 is alarming due to its potential negative impact on global living standards,” expressed WTO Director-General Ngozi Okonjo-Iweala. She emphasized the importance of strengthening the global trading framework to combat these challenges. The global economy, especially poorer nations, will find it challenging to recover without a stable and rules-based multilateral trading system.

WTO Chief Economist, Ralph Ossa, observed, “We are noticing signs in the data of trade fragmentation tied to geopolitical tensions. Fortunately, a broader deglobalization is not evident yet. Our data suggests that goods continue to be produced through intricate supply chains. These chains' extent may have plateaued, at least temporarily. We anticipate positive export and import volume growth in 2024, but we need to stay alert.”

The forecast doesn't cover world commercial services trade. However, preliminary data indicates that growth in this sector might be moderating, following the strong rebound in transport and travel last year. World commercial services trade saw a 9 percent year-on-year increase in the first quarter of 2023, contrasting with a 19 percent rise in the second quarter of 2022.

In the report, the WTO highlights the abrupt slowdown in world trade and output in the last quarter of 2022. This was influenced by the effects of tighter monetary policies in major economies like the US and the European Union. However, decreasing energy prices and the lifting of pandemic restrictions in China had raised hopes for a swift recovery. Yet, these hopes have not come to fruition. Factors such as strained property markets in China and persistent inflation in the US and EU have darkened the trade outlook for 2023 and 2024.

The update maintains that the trade slowdown is widespread, affecting numerous countries and a wide range of goods. However, there are exceptions, such as passenger vehicles, which have seen a surge in sales in 2023. The exact reasons for this slowdown remain ambiguous, but factors like inflation, high-interest rates, the appreciation of the US dollar, and geopolitical tensions are all potential contributors.

China Downturn

Unlike the UNCTAD’s Trade and Development Report 2023, which suggested economies of EU member countries, especially Germany, as primary contributors to a bleak outlook, the WTO points towards risks from a sharper-than-expected downturn in China and a possible resurgence of inflation in advanced economies.

The report balances its overall assessment by also considering potential positive outcomes. "Growth might exceed expectations if inflation drops rapidly, allowing for an early withdrawal from contractionary monetary policies," the report notes.