Stephen Roach (via Brad DeLong) thinks the surge in global trade, generally viewed as a driver of recent prosperity, is at risk of being derailed:
Indeed, there can be no mistaking the increasingly important role global trade has played in driving world economic growth in recent years. By our estimates global trade in goods and services now amounts to 25% of world GDP, up dramatically from the 19% share just ten years ago and an 11% portion in 1970. Over the past 17 years, 1987 to 2003, surging global trade has accounted for fully 33% of the cumulative increase in world GDP. By contrast, over the 1974-86 period, trade accounted for about 17% of the cumulative increase in world GDP. In other words, since the late 1980s there has been a virtual doubling of the role that trade has played in driving the global GDP growth dynamic. There can be no greater testament to the power of globalization.
Yet there are worrisome signs that the trade dynamic is now going the other way. After surging by a record 13% in 2000, global trade has entered one of its worst slumps in modern experience — average gains of just 2% over the 2001-03 period. That’s the weakest performance since the early 1980s and only a third of what we estimate to be a 6.5% long-term trend in global trade growth. Coming in the context of one of the mildest global recessions in recent history, this shortfall is all the more disconcerting. It suggests that there may be new forces coming into play that transcend the normal pressures of the business cycle.
Roach suggests the recent wave of outsourcing illustrates that labor has become more “fungible” than ever. Consequently, we may continue to see jobless recoveries in high-wage countries which may spark a political backlash against trade liberalization.
Roach notes five recent examples of setbacks on the trade front:
- The breakdown in WTO ministerial negotiations in Cancun, Mexico.
- The continuing fallout from the Bush administration’s tariffs on steel imports.
- The Bush administration’s quotas on Chinese textiles and other anti-China rumblings in Congress.
- U.S./European tensions on agricultural subsidies and disputes on other services.
- Ongoing difficulties in reaching a consensus on bilateral and regional trade agreements.
Often these type of developments don’t get as much play in the media as they deserve. But they warrant attention, for they have a notable long-term impact on the economy.