What happened to global trade? This is the question that is puzzling many analysts and
commentators in the wake of the recent slowdown of global trade growth. Since
the 1950s (see Chart 1), international trade grew faster than GDP –at a ratio
of 1.4 -, with the 1990s representing a golden decade for trade, with growth
rates more than double those of global income. This trend appears to have
reversed in the last three years, with trade growing at 3% in 2012 and 2013
(and expected at a meagre 3.1% in 2014, according to WTO forecasts), a slower
growth rate than the global economy. Suggestions of ‘peak’ trade abound in the
financial press. The causes for such statistical anomaly could be both cyclical
and structural and are usually broken down as follows:
1)
the ongoing crisis of the Eurozone economies whose internal trade represents
about 25% of global flows;
2)
a secular transformation of the Chinese economy, where overseas parts for
products assembled in China are gradually being replaced by parts made in the
country (see Chart 2), especially in factories built inland over the years by
foreign companies –it is becoming evident that the cost to move such parts to
final assemblers is lower than shipping them from overseas, due to the
improvements in the country’s transport infrastructure;
3)
despite being a more recent trend, the end of the commodity boom is also held
responsible, with rising volumes of energy and food exports not being able to
compensate for the price weakness of commodities (caused, especially in the
case of oil, by a supply glut and more efficient use of resources);
4)
a lower supply of trade finance, sparked by the global financial crisis of
2008, which saw a significant increase in regulation and capital costs for
providing trade finance to importers and exporters. This resulted in many
leading European banks exiting from the sector altogether;
5)
a slower pace of trade liberalization and some re-emergence of protectionism,
also caused by the financial crisis.
While
there is little evidence that trade finance developments and slower
liberalization played a role in sluggish trade growth (will come back to this
later), the reality might be that such slowdown is only a reversion to
long-term trends, after an extraordinary period of growth in the 1990s when the
emergence of global supply chains shaped a sea change in the world’s economic
infrastructure. Trade growth started slowing down before the 2008 financial
crisis, mainly as a consequence of reduced offshoring (or even reshoring,
although this was quite limited) of industrial production. China can be seen as
the main culprit for this, but only because, in the words of Aaditya Mattoo,
head of trade research at the World Bank, “it globalized internally” a longer
section of the global supply chain (i.e. trade flows took place within
China and not across borders). Despite this, China has also emerged as the true
“mega-trader”, a role last played by Victorian Britain at the end of the 19th
century. China represents today 11.5% of global trade (which in turn
constitutes almost half of its own GDP). However, as China’s economy’s
matures, its contribution to global trade growth and the pace of globalization
will necessarily diminish and be replaced by other players.
An
historical look at the different waves of globalization will explain why. The
first wave occurred before World War I, when European countries imported
commodities from the rest of the world in exchange for manufactured goods.
Goods were produced in a region, but consumed in another. The second wave took
place after World War II and was characterized by the break-up of production
itself, with various stages performed in different locations. This was the
traditional global supply chain.
The
third wave of globalization is the one we are witnessing today, where growing
specialization is further breaking down manufacturing of goods into specific
tasks. Take the example of Apple products, which are designed in California,
assembled in China, but with parts actually produced in other countries like
Taiwan and Korea. Another fitting example is that of t-shirts manufactured in
Mexico, with textiles imported from the US and the final product re-exported to
the US. One might argue that the actual import is one of “tailoring services”
from Mexico to the US.
Rapid
advances in telecommunications, robotics, 3D printing and
other edge technology are lowering the barriers to further specialization. As
China matures (and its wages increase) further countries are joining the fray
and are becoming specialized (and low cost) providers of either design,
assembly or other manufacturing services to the global economy. Countries like
Vietnam, Bangladesh, the Philippines and increasingly also Nigeria, Ghana,
Uganda and Ethiopia are rapidly becoming integral part of this third wave of
globalization. This phenomenon is known as the “flying geese” pattern of trade,
where development of an economy and its subsequent wage increases trigger
further offshoring to other economies. Whatever the reason, this will in turn
provide a boost to global trade growth and allay fears that global economic
growth is coming to a halt.
What were the repercussions of these global trends on
trade finance? Trade finance is certainly important for
global trade, with the BIS estimating that around a third of all trade is
supported by some form of bank financing. Did the global trade collapse (-38%
from peak to trough) cause trade finance also to collapse or vice versa? It is
true that, at first sight, traditional trade finance stagnated in 2009-2013,
with many banks withdrawing from the market and causing a contraction in
capacity in trade and export finance. However, the resulting gap has been
filled in part by international banks and large emerging market banks. The
emergence of such new competitors also contributed to tighter margins in
traditional trade and export finance. This was particularly true in a number of
markets, including Turkey, China and Brazil, where local banks sought to grab
market share from the traditional players. The story is different for
receivable and supply chain finance, where improvements in the legal
environment allowed these less traditional trade finance products to flourish,
increasing their share of overall trade finance transactions to around 25% of
the total.
Changes
in global banking regulation are also driving another significant phenomenon in
trade finance. The introduction of stricter liquidity requirements under Basel
III (for example the Net Stable Funding Ratio) has made certain asset classes
less expensive to house on non-bank balance sheets. This is leading to the
emergence of new non-bank players in trade finance: factoring and leasing
companies, credit insurers, asset managers and hedge funds, with the latter
looking at medium- and long-term trade finance assets as an alternative
investment class, with relatively attractive yields (and lower capital
requirements than for banks).
The globalization of trade has also been accompanied by digital and
technological progress, which is affecting trade finance patterns. While in the
past non-bank players were at disadvantage vis-à-vis banks because of the lack
of distribution channels (i.e. bank branches), more and more trade finance
transactions are now available and can be captured online, allowing non-bank players
to access corporate customers more easily. This is shifting the traditional
feature of trade finance from being ‘documentation-based’ to being processed
entirely electronically. All these trends are rapidly increasing the
availability of trade finance (see Chart 3) which, combined with the fading of
protectionist measures, will act as an engine of growth for global trade in the
next decade - albeit at lower rates than in the past 20 years. That is,
until the next wave of globalization takes shape.
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