Reasons for Trade Slowdown Globally

Explaining the global trade slowdown

Cristina Constantinescu, Aaditya Mattoo, Michele Ruta 18 January 2015

Not only is world trade lower than its pre-Crisis level, but it is also growing slower than GDP. This column examines the relationship between trade and GDP in the last four decades. The findings indicate that roughly half of the slowdown is driven by structural rather than cyclical factors. Trade itself has become less responsive to GDP in recent years. In particular, supply chains are maturing after years of rapid expansion.

Simon J Evenett

After bouncing back from the historic low in the aftermath of the Global Crisis, world trade (total trade volumes) grew by 6.2% in 2011, 2.8% in 2012, and 3.0% in 2013 (Figure 1). This growth in trade volumes is substantially lower than the pre-Crisis average of 7.1% (1987-2007), and is slightly below the growth rate of world GDP in real terms, which has hovered around 3% in recent years. 

Figure 1. Level and growth rates in volume of trade over time

Source: IMF World Economic Outlook.

Structural versus cyclical factors

Cyclical factors contribute to the global trade slowdown. Historically, the negative effect of a crisis on trade performance has not been limited to the crisis period, but persisted through the medium term (Freund 2009, Abiad et al. 2014). The weakness in import demand is symptomatic of overall weakness in aggregate demand. Not surprisingly, weakness in demand has been most pronounced at the epicentre of the Crisis – in high-income countries, notably the Eurozone. With high-income economies accounting for some 65%of global imports, their lingering weakness inevitably impacts the recovery in global trade.

However, a deeper reason for the trade slowdown is the changing long-run relationship between world trade and GDP. In a recent paper (Constantinescu et al. 2014), we estimate the relationship between trade and GDP in the last four decades and find that the long-term trade elasticity rose significantly...