Some, but not nearly all, of the slowdown can be blamed on continued weak demand in Europe and slower growth in China. Protectionist responses to the Great Recession and its aftermath exacerbate weak demand and are another contributing factor. Structural change and the maturing of supply chains is another potential explanation, but there is less consensus on that.
There is no doubt that there was an increase in the use of trade remedies, subsidies, buy national policies and other discriminatory measures in response to the strains of the Great Recession. And, as the Global Trade Alert shows, many of those measures remain in place years later. The populist backlash against globalization in Europe and the United States also raises the specter of more such actions to come. But while discrimination in international markets has clearly increased, it is difficult to assess how much trade is affected and, therefore, how much of the trade slowdown these measures explain.
Structural changes in China, along with a slowdown in supply chain expansion, plausibly explain a larger share of the overall slowing of trade growth. This chart from Aaditya Mattoo and colleagues at the World Bank (from an online article here) clearly demonstrates the sharp slowdown in growth of vertical integration in global exports.
Note: Annual rate of change is computed using the compound annual growth rate formula.
The key question for policymakers is why did this happen? One explanation is simply that trade in intermediates grew very rapidly early in this period when technologies spread that made the fragmentation of trade possible and global supply chains took off. Those supply chains have now matured and growth is naturally slowing. Another factor is that, as the Chinese economy has grown and moved up the value chain, it is producing more inputs, and consuming more final goods, domestically, as well as shifting to more demand for services. This suggests that the rapid trade growth of recent decades was a temporary phenomenon and that the current slowing may be a shift to a “new normal.”
Should policymakers care that trade growth is slowing and may no longer grow faster than income? A recent, preliminary, analysis by Mattoo and colleagues finds that there are negative effects on growth from the trade slowdown, but they do not appear to be large. Moreover, new technologies such as robots and 3D printing reduce the need for low-wage labor and for imported components and could encourage the shortening of supply chains. So it could be that trade grows more slowly than in the recent past because technology makes it more efficient to produce more things locally.
Reduced reliance on supply chains because of technological change is one thing. But in a recent interview with the Financial Times, the head of President Trump’s new National Trade Council, Peter Navarro, suggested that one of the administration’s trade priorities would be to promote faster and broader unwinding of global supply chains:
It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components…. We need to manufacture those components in a robust domestic supply chain that will spur job and wage growth.
Presumably this would be done through jaw-boning, but also perhaps through new border taxes, the abrogation or adjustment of trade agreements, and other policy measures that discourage trade. That sort of rapid, indiscriminate unwinding of supply chains would be highly costly for the United States and its trading partners, as documented by Peterson Institute scholars. It would raise costs for producers and consumers and trigger retaliation from countries negatively affected by new trade barriers. This infographic from The Washington Post, maps the export dependence of US counties and shows that those with the highest proportion of jobs at stake in a trade war would be in states that voted for the president. To sum up, the technological and other forces that drove the development of global supply chains in recent decades are fading and that phenomenon appears to have peaked. New technologies could spur a partial reversal of recent patterns of fragmented production and trade. Trying to accelerate the shortening and reshoring of supply chains through discriminatory trade measures threatens instead to make the United States less productive and most Americans poorer.Kimberly Ann Elliott is a Senior Fellow with the Center for Global Development and the author or co-author of numerous books and articles on trade policy and globalization, economic sanctions, and food security. Previously, she was with the Peterson Institute for International Economics. The views expressed here are her own.
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