News, Trends, & Analysis

World Trade Will Continue to Grow Faster Than the Global Economy

by Walter Kemmsies, Chief Economist for Moffat & Nichol

Despite several episodes of oil price spikes, several financial crises, and flare ups in geopolitical tensions, global trade in manufactured goods has grown on average 7.6 percent per year over the last six decades, while inflation-adjusted global GDP has grown 3.8 percent, according to World Trade Organization data and Moffatt & Nichol estimates for 2007.

While economic growth is an underlying driver of trade growth, it does not fully account for trade growing twice as fast. Other long term structural factors have contributed to high growth levels. The good news is that trends for these structural factors are such that trade will continue to grow faster than GDP through the end of the next decade

Four Factors Driving Trade Growth

There are at least four structural factors driving trade growth higher than real GDP growth:

1. Containerization of Trade. The chart above shows that the number of ports around the world reporting container volumes since 1970 increased from 75 to over 550 in the last few years. Containerization lowers the cost of trade and therefore allows manufacturers to reach a larger market or relocate production operations to lower cost locations.

2. Removal of Trade Barriers. Between 1947 and 2008, there have been 9 rounds of global trade agreements beginning with the Global Agreement on Trade and Tariffs at the Geneva round and most recently the failed Doha Round which began several years ago. In the meantime, the Maastricht Treaty in Europe and NAFTA contributed significantly to trade growth as did China’s ascension to the WTO in 2001. The Business Roundtable estimates that 50% of world trade takes place under Free Trade Agreements, with about one third of them having been established in Asia since 2001.

3. Information and Communication Technology. The Internet is accessible worldwide so that businesses can operate production and distribution software that allows them to globally manage their activities.

4. Demographics. The populations of Europe, North America, and Japan are aging as their baby boom generations enter retirement. The demand for services (leisure and entertainment, healthcare, financial advising, legal services) by older people grows faster than their demand for manufactured goods. Therefore, as the service sector bids labor away from manufacturing, the manufacturing sector, which is less location-sensitive due to containerization, lower trade barriers, and better information technology will continue to outsource to lower cost labor locations.
Each of these trends still has room to continue.

Globalization Ongoing

The global organization, or globalization, of business is an ongoing process. Recently the underwear manufacturer Hanes announced it was moving its U.S. manufacturing to South Asian locations. The U.S. auto industry has lagged other industries in terms of globalization, but as demand for more fuel-efficient vehicles continues to grow, these companies are more likely to source output from locations in countries that have traditionally demanded cheaper and lower mileage vehicles.
Russia is still attempting to become a member of the WTO, which may not impact global trade as much as China’s ascension did, but given the size of its economy, will still have a major impact.

More important than Russia joining the WTO is resolution of the Doha Round. The Doha Round involves the U.S. and Europe removing agricultural tariffs, Latin America removing tariffs on manufactured goods, and Asia respecting intellectual property rights. There are many manufactured goods with high intellectual property value that will not be offshored until Doha is resolved. Resolution of Doha could see growth in trade reach even greater levels than in the wake of China’s formal entry into the WTO in 2001.
Information technology is still improving and is not yet fully deployed on a worldwide basis. Continuing improvement will further facilitate the globalization of the world economy.

The U.S. population is retiring at an accelerating rate. This year 3.2 million people will turn 62, about 8,767 per day. In 2000, one in five Americans were over the age of 55, in 2010 it will be one in four, and by 2020 one in three, according to Census Bureau estimates. This indicates that offshoring of manufacturing is likely to accelerate, not slow down.

While there is valid concern about overcapacity in some segments of transportation infrastructure, because not all locations are ideal, it is generally true that if you build it, they will come. The near term is likely to see continued volatility due to oil prices, housing problems, and financial sector retrenchment, but these factors have not mattered in the long term.