World Trade Volume Will Fall 9% in 2009

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Monday, 30 March 2009

2009 proves to be a tough year so far for the shipping industry and especially the dry bulk shippers as the world recession hammered the trade of commodities and exporting goods from Asia and the rest of developing world. At the same time, consumption has been reduced at the developed nations, something that leads to less imports of goods and products. According to the World Trade Organization world merchandise trade is likely to fall some 9% in volume terms in 2009 with developed economy exports falling by some 10% on average and developing country exports shrinking by 2—3%. These are bad news for the world’s shippers, as international shipping transports about 90% of world trade by volume. Without shipping, intercontinental trade, the bulk transport of raw materials and the import/export of affordable food and manufactured goods would simply not be possible, but at the same time the fall of cargoes plagues the industry.
WTO analysts underline that a normal pattern for a recession, where trade falls, remains weak for a time and then resumes its upward trajectory and begins to return to its previous trend. If that scenario is correct, that means we are in the heart of recession, but the future looks more bright.
Trade prospects for 2009 are heavily conditioned by the financial crisis that began almost two years ago in the United States. The crisis intensified dramatically following the collapse of the Wall Street investment bank Lehman Brothers in September of last year, and the government led the rescue of a number of financial institutions in the United States and elsewhere. Turmoil in the financial sector and acute credit shortages spread inexorably to the real sector. Declining asset prices, faltering demand and falling production translated into dramatically reduced and in some cases negative production and trade growth in many countries. Trade has also been affected adversely by a sharp shrinkage in credit to finance imports and exports.
Since the recession began to take hold in the fourth quarter of 2008 there has been little cause for optimism in the outlook for trade in 2009. The financial crisis has disrupted the normal functioning of the banking system and deprived firms and individuals of much-needed credit. Falling stock markets and housing prices have also administered negative shocks to wealth in the United States and elsewhere, making households unwilling to purchase durable goods such as automobiles while they attempt to rebuild their savings. Falling commodity prices, while a boon to consumers in importing countries, have also deprived oil-producing countries of export revenues.
Not even China, with its dynamic economy, can insulate itself from global downturn when most of its main trading partners are in recession. China’s exports to its top six trading partners (treating the EU as a single partner) represented 70% of the country’s total exports in 2007. All of these trading partners are currently experiencing economic contraction or slowdown and are likely to exhibit weak import demand for some time.
Available monthly data for most major traders show large drops in merchandise exports and imports through the first two months of 2009. An exception to this pattern of decline in trade flows is discernible for certain economies in Asia, where positive monthly import growth numbers were recorded for China (17 per cent) and also for Singapore, Chinese Taipei and Vietnam. While this is only a single month of data, and should therefore be interpreted cautiously, it could be evidence of slowing decline and perhaps a “bottoming out” of negative trade growth trends. Future trade growth will, of course, depend on what happens to demand elsewhere in the world economy.
Moreover, the question must be asked as to how far trade could conceivably fall in the months ahead. As an example, consider China’s exports. In February these were down 26% compared with the same month in the previous year and 28% compared with January. If one were to extrapolate this downturn, China’s exports would be approaching zero within ten months to a year. This is obviously a highly implausible scenario and emphasizes the reality that such steep declines as those we have witnessed recently will not persist.
Reasons for trade contraction
Trade growth data show declines that are larger than in past slow-downs. A number of factors may explain this.
One is that the fall-off in demand is more widespread than in the past, as all regions of the world economy are slowing at once.
A second reason for the magnitude of recent declines relates to the increasing presence of global supply chains in total trade. Trade contraction or expansion is no longer simply a question of changes in trade flows between a producing country and a consuming country — goods cross many frontiers during the production process and components in the final product are counted every time they cross a frontier. The only way of avoiding this effect — whose aggregate magnitude can only be guessed at on account of the absence of systematic information — would be to measure trade transactions on the basis of the value added at each stage of the production process. Since value-added, or the return to factors of production, is the real measure of income in the economy, and trade is a gross flow rather than a measure of income, it follows from the reasoning above that strong increases or decreases in trade flow numbers should not be interpreted as an accurate guide to what is actually happening to incomes and employment. A third element in current conditions that is likely to contribute to the contraction of trade is a shortage of trade finance. This has clearly been a problem and it is receiving particular attention from international institutions and governments. The WTO has been playing a role as honest broker by bringing together the key players to work on ensuring the availability and affordability of trade finance.
A fourth factor that could contribute to trade contraction is protection. Any rises in protection will threaten the prospects for recovery and prolong the downturn. The risk of aggravated protectionism is rightly a source of concern going forward.