China has just announced that for the first time since the opening of the country’s economy to the outside world in the late 1970s, Chinese export volumes have decreased in annual terms. But that’s not all: in 2015, world trade volumes also decreased in value terms. The question arises – why? The answer should be sought in the dynamics of commodity prices.
The end of globalization signals shifts in BRICS world trade slowdown, influenced by falling commodity prices and evolving global value chains.
Trade Decline in 2015
In 2009, world trade volumes also decreased, but the explanation was obvious. The world saw a sharp reduction in GDP. However, last year the global economy grew by a decent 3%. Moreover, trade barriers have not increased significantly anywhere, and transport costs are falling due to a sharp drop in oil prices.
Much is said by the fall to a record low of the so-called Baltic Dry index, which measures the cost of chartering large vessels that handle the lion’s share of long-distance trade shipments. This means that markets do not expect a recovery in trade volumes. Thus, the data for 2015 may mark the beginning of a new era of trade slowdown. From this follows an obvious conclusion: the once irresistible forces of globalization are running out of steam.
China’s Role in Global Trade
A vivid evidence is the situation in China. Over the past decades, China has transformed the global trade system, becoming the leader in world trade volumes. But now in the country, both import and export volumes have fallen in monetary terms, although the former have decreased more due to the collapse of world commodity prices.
Moreover, commodity prices provide the key to understanding trade trends over the past several decades. When prices were high, this contributed to the growth of trade volumes, in particular, the trade-to-GDP ratio grew. Thanks to this, discussions about the inevitable progress of globalization gained popularity. However, in 2012, commodity prices began to fall, soon dragging trade volumes down with them.
Impact of Commodity Prices
Suppose that one ton of steel and ten barrels of oil are needed to produce one car. In 2002–2003, this set of raw materials cost about $800, that is, 5% of the cost of a car for $16,000. This means that in the early 2000s, industrial countries had to export five cars to import 100 sets of these commodities.
By 2012–2013, the cost of raw materials needed for one car had risen to about $2,000, that is, approximately 10% of the cost of the same car (car prices rose much less during this time). Therefore, industrial countries had to double their exports, namely sell ten cars for the same volume of raw materials.
Obviously, there is a direct correlation between trade trends and commodity prices (see graph). Since this relationship affects all industrial goods for the production of which raw materials are required, it is not surprising that the decrease in commodity prices is accompanied by a decrease in world trade volumes.
Physical Volumes and Trade Ratios
Someone may object that this example concerns only the size of trade in value terms and that in recent decades the growth of physical trade volumes has exceeded the growth of real GDP. However, commodity prices also affect physical trade volumes, as the rise in these prices forces industrial countries to increase export volumes (ten cars instead of five, as in the above example) to cover the costs of importing the same volumes of raw materials.
Food, fuel, and commodities account for about a quarter of world trade turnover, so in the case of changes in prices for these goods (especially as strong as in recent decades), the final trade statistics naturally also change. Given the massive drop in commodity prices recently, there is no particular need to look for any other explanation for the recent slowdown in trade turnover.
Globalization vs Trade
This does not mean that globalization and trade are one and the same. Globalization has many other manifestations – for example, a sharp surge in international financial operations and tourism, data exchange, and other types of economic activity. At the same time, all interconnections affect trade, since they made possible the emergence of global value chains, in which different stages of the production process are carried out in different countries.
However, the role of this phenomenon is overestimated. According to the World Trade Organization, in most countries with large economies (for example, the USA, EU), the share of foreign added value in the price of exported goods is about 15%. In other words, the global value chain has little significance for such countries leading in world trade.
China’s Exception and Future Trends
The only exception is China. Its role as an assembly shop for world products leads to the fact that it imports most of the elements with the highest added value for the production of this product. However, as the industrial structure matures (iPhones assembled in China contain significantly more parts produced in China than a few years ago), the country will approach the USA and EU in terms of added value sizes, not the other way around. And this is another reason why the role of trade may decrease.
When a fashionable infatuation arises, there is almost always some real reason. In most countries, the economy is now more open than a generation ago. But now it is becoming clear: the opinion that globalization is such a huge and irreversible force is largely due to the side effects of the commodity boom of the last decade. If prices remain low (which seems likely), in the next decade global trade may well begin to stagnate, with a “rebalancing” of the trade structure from developing countries to traditional industrial powers.
For more on commodity prices impact, see [Link to related BRICS article].
According to IMF reports on global value chains, such shifts affect world trade slowdown .
In conclusion, the end of globalization reflects BRICS world trade slowdown, driven by commodity prices impact, China export decline, and changes in global value chains.
